Global bond managers look set to be the next big beneficiaries of a hunt for yield that continues to drive public pension funds in Japan away from Japanese government bonds.
The allocation target for foreign bonds — for the country's ¥169 trillion ($1.52 trillion) Government Pension Investment Fund and other public funds — was boosted to 25% from 15% in the latest model portfolio unveiled by Japan's Ministry of Health, Labor and Welfare on March 31. The ministry updates target allocations for public funds with close to $2 trillion in assets every five years.
That gain came at the expense of domestic bonds, which saw their target weight drop to 25% from 35% in the model portfolio that took effect in April 2015. Prior to that, JGBs had pride of place in public pension portfolios with a 60% weighting.
Domestic equities and overseas equities held steady at 25% each. Five years ago, those asset segments more than doubled, making them the top gainers as the allocation to domestic bonds dropped to 35% from 60%.
Analysts said the latest model portfolio effectively finds public funds taking on more risk to secure the 1.7% inflation-adjusted annual return mandated by regulators.
Adding foreign currency exposure — as overseas bonds displace JGBs in portfolios — will push public funds further out along the risk spectrum, said a consulting veteran in the Asia-Pacific region who declined to be named. With the correlation of currency movements and equity prices over the past decade, that shift will spell more risk for the whole portfolio, he predicted.
Big public funds, in announcing their adoption of the new policy portfolio mix, made it clear they were moving more out of necessity than choice.
With extraordinary monetary policy easing pushing developed country yields to historic lows, it has become impossible to secure mandated real annual returns of 1.7% with the current policy mix, the ¥24 trillion ($216 billion) Pension Fund Association for Local Government Officials, known locally as Chikyoren, said in an announcement posted on its website March 31.
In late Asian trading on April 3, the yield on the 10-year JGB was -0.009%.
After JGBs, foreign bonds offer the next lowest risk as well as superior returns, the Tokyo-based fund added.
Global managers in Tokyo and the broader Asia-Pacific region said they have yet to see signs of an imminent flood of public pension fund allocations to overseas bonds, amid uncertainties surrounding the global coronavirus crisis and a changing of the guard at GPIF, which installed a new president Masataka Miyazono and a new chief investment officer, Eiji Ueda, on the April 1 start of Japan's new fiscal year.