With equity markets and other risk assets rebounding strongly in recent years, finding opportunities capable of delivering similar returns going forward is getting “harder and harder,” Matt Whineray, chief investment officer of the NZ$25.5 billion (US$22.1 billion) New Zealand Superannuation Fund, Auckland, said in a May 12 interview.
It's not time to get defensive, but against the backdrop of low volatility and plentiful liquidity, “the real difficulty (now) is that sort of asset allocation decision,” he said.
If it's a tricky moment for asset allocators, then the GPIF — tapped by Prime Minister Shinzo Abe to play a supporting role in his plans to revive Japan's economy — could be facing a governance test if its quantum leap into higher-risk assets comes at a pricey entry point.
The GPIF's move into riskier assets isn't self-directed — it's a result of government pressure, said a veteran Tokyo-based investment consultant who declined to be named.
If “Abe-nomics” ultimately works, the move into risky assets will appear consistent with the GPIF's fiduciary duties. But the fund could face a backlash should a less friendly market environment ensue, said the consultant.
In a June 20 interview, Yasuhiro Yonezawa, the Waseda University finance professor tapped earlier this year to head the GPIF's investment committee, said when new asset allocation targets are decided this fall, transitioning the portfolio likely will be gradual.
Observers expect the GPIF's targeted allocations to Japanese stocks, global stocks, global bonds and alternatives to rise at the expense of domestic bonds, which could drop to 40% from 60%.
Reducing the domestic bond exposure is easy compared to deciding where to redeploy the money, said Mr. Yonezawa, adding the government would probably prefer to see as much of that money as possible allocated to Japanese stocks. And arguments in favor of local stocks can be made now in terms of valuations, as well as improvements in governance and return on equity, he said.
Shan Lan, a Hong Kong-based equity strategist with Deutsche Bank, said the GPIF could invest an additional US$50 billion to US$100 billion in Japanese equities if the fund's domestic stock target rises — as some predict — to 20%, plus or minus six percentage points, from 12%.
Mr. Yonezawa said his committee won't necessarily share the government's focus on local stocks, relying instead on risk-return data to determine the best mix among domestic stocks, foreign stocks and global bonds.
When asked about alternative investments, he said it would be a challenge to find segments with enough capacity to make a difference for a fund where a one percentage point allocation amounts to $13 billion.
Earlier this year, the GPIF made initial forays in infrastructure and Japan real estate investment trusts. Mr. Yonezawa predicted the GPIF will invest more in infrastructure because it is capable of absorbing sizable allocations. He said private equity, global REITs and direct real estate investments are areas under review.
On the governance front, Mr. Yonezawa said the fund will be restructured over the next year or two as a more independent entity with a board of trustees. Now, GPIF President Takahiro Mitani has decision-making authority, while reporting to the minister of health, labor and welfare.
A number of market veterans said they see no reason to be overly pessimistic about the GPIF's prospects for making a successful transition to a higher-risk, higher-return portfolio.
“Rebalancing a portfolio is always a risky move, and some of the low-hanging fruits are already picked,” said Tai Hui, global market strategist, Asia, with J.P. Morgan Asset Management in Hong Kong.
But with U.S. and Japanese stocks supported by earnings growth, emerging market equity valuations more interesting after recent declines, and other pockets of value, it should still be possible to generate “a respectable return,” Mr. Hui said.