Currency hedging could help make Japan's Government Pension Investment Fund more resilient if a global slowdown threatens to claw back some of the heady equity-fueled gains the Tokyo-based plan racked up in recent years.
Norihiro Takahashi, president of the ¥165.6 trillion ($1.45 trillion) pension fund, said in an interview that the GPIF has begun hedging a portion of its 15% foreign bond allocation and is open to doing more "if we predict the value of the yen will go up."
That, in turn, could leave the fund's ¥25 trillion foreign bond allocation better positioned to cushion any downside for the GPIF's portfolio if and when the past decade's global bull run for equities draws to a close.
Since October 2014, when the GPIF doubled its target for equity to 50% and slashed its target for Japanese government bonds to 35% from 60%, the fund's fortunes have waxed and waned — but mostly waxed — in tandem with global equity markets.
For the quarter ended Sept. 30, GPIF reported combined investment gains of ¥5.3 trillion on its holdings of domestic and overseas equities — 98% of its overall ¥5.4 trillion for the period. For the prior quarter, equity-related gains accounted for 93% of the total.
But in recent months, the bull market has shown growing signs of fatigue, with the S&P 500 benchmark index off 9.7% since the start of October — just short of a 10% correction.
Mr. Takahashi said the GPIF, as a long-term investor, is more focused on the positive backdrop from the growing ranks of people — especially in emerging markets — participating in and benefiting from the global economy than on signs of short-term weakness.
However, in the event economic headwinds emerge and push equity valuations lower, Mr. Takahashi predicted the fund's allocations to overseas bonds and, to a lesser extent, its 25% holdings of Japanese government bonds sporting negligible yields, will provide some cushion for the portfolio.
But in recent years, the yen's status as a safe-haven currency for investors when market volatility spikes has made the GPIF's foreign bond allocations — which were entirely benchmarked to non-hedged indexes as of March 2018 — a less than reliable cushion.
For example, over the past 10 quarters, only two quarters — the ones ended June 30, 2016, and March 31, 2018 — ended with sharp declines for global equities. In both instances the yen appreciated against the dollar, by 8% and 6%, respectively. Instead of offsetting the fund's equity-related losses, the GPIF's foreign bond allocations piled on trillion-yen losses of their own.