JPY: GPIF Portfolio Stance in Focus Again – Nomura
Research Team at Nomura, notes that the comments from the new President
of the GPIF, Mr. Takahashi, on his portfolio management stance attracted
market interest this week.
“GPIF’s portfolio shift from JGBs into domestic equities and foreign assets has been progressing. Nonetheless, the market environment has changed over the past few months, with the BOJ introducing negative rates and JPY appreciating broadly. Thus, it is unsurprising that investors are focusing strongly on the GPIF’s investment stance, especially after the change in leadership.
In his interview with Bloomberg, Mr. Takahashi said that “just because interest rates are negative does not mean we will suddenly reduce bonds or increase Japanese equities” and that “when we created our current portfolio, interest rates were already low.” His comments suggest the fund is unlikely to change its new target portfolio anytime soon, although even 10yr JGB yields are now negative.
At the same time, Mr. Takahashi said it is possible for equity shares to be above the centre of the target, within the target range, if valuations are attractive. Domestic and foreign equity shares are estimated to have approached the target as of end-March, but dip-buying by the GPIF (Government Pension Investment Fund, Japan) and other public pension funds is still likely to support risk sentiment.
In terms of currency hedging, Mr. Takahashi said the GPIF is looking to hedge foreign assets (Nikkei, Bloomberg). The fund was reported to have considered hedging its EUR exposures last December, but its hedging could be gradually broadened to include USD and other currencies.
Nonetheless, we see large-scale FX hedging by the GPIF as unlikely, because 1) hedging costs erode returns of foreign exposures (especially USD assets), and 2) hedging decreases diversification benefits (can give just JPY bond risk/return). In fact, in his interview with the FT, Mr. Takahashi said “given we are a long-term investor, we do not expect a big role for currency hedges.” He also added that the aim of hedging would be to smooth volatility rather than fundamentally reduce currency risk. Thus, we still judge that the GPIF’s expected further portfolio shift from JGBs into foreign assets will be JPY-negative.”