Japan: GPIF diversification helps returns - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the diversification of Japan’s Government Pension Investment Fund (GPIF) into foreign assets that was most pronounced in 2014 and 2015 reaped the reward of that in Q4 last year with the Trump effect on the markets lifting returns.

Key Quotes

“The GPIF recorded a 7.98% non-annualised return in Q4 with a JPY 10.5trn increase in income – the largest one-quarter return on record. The surge in global equity markets and the plunge in the value of the yen were the key factors in this. Of course diversification into foreign markets works both ways and the strength of the yen and equity market weakness resulted in a 3.88% loss in Q1 2016.”

“As a result of yen depreciation, GPIF allocations in foreign assets increased back towards the new targets set under Abenomics. Foreign bonds accounted for 13.4% of the fund, not far from the 15% target and well within the +/-4% range. Foreign stocks accounted for 23.2% of the fund, close to the 25% target and well within the +/- 8% range. Domestic bond holdings fell again, to 33.3%.”

“One factor we cite in terms of the changing dynamics in the yen market that makes it increasingly difficult for the yen to remain on a weakening trend is the change in this diversification flow. As seen in the chart, Japan Trust buying (used by GPIF) of foreign equities jumped significantly in 2014 and 2015 – an outflow that supported yen selling. However, that outflow has all but disappeared with GPIF targets met, taking away one source of yen selling that existed in 2014 and 2015.”