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World’s Biggest Pension Fund Plans to Start Investing in Emerging Markets

By Tomoko Yamazaki and Komaki Ito
September 30, 2011 3:57 AM EDT 1 Comments
World’s Biggest Pension to Start Emerging Stocks Investment
World’s Biggest Pension to Start Emerging Stocks Investment

Japan’s public pension fund, the world’s largest, will start investing in emerging market stocks by the end of the year as it diversifies assets to maintain stable returns.

The Government Pension Investment Fund, which oversees 114 trillion yen ($1.5 trillion), is in the final stage of deciding the managers who will handle the investments, said Takahiro Mitani, president of the fund, known as GPIF. The investments will be focused on markets included in the MSCI Emerging Markets Index, he said.

“It looks like a good time to start investing in emerging markets,” said Mitani in an interview in Tokyo on Sept. 27. “Prospects for growth still remain strong for emerging markets relative to the developed countries, which means expected returns will be higher.”

The fund, whose majority of investments is in domestic bonds, is seeking better returns to cover payments in the world’s most rapidly aging society. The MSCI Emerging Markets Index has dropped 21 percent this year, more than the 12 percent decline by the MSCI World Index of developed stocks, amid inflationary concerns and as the European sovereign debt crisis prompted investors to sell assets deemed risky.

The shares of companies included in the emerging-market gauge, are trading at 9.9 times estimated 12-month earnings, compared with 12.2 times for stocks in advanced economies. Developing nations made up eight of the 10 best performers this year among 93 global benchmark stock gauges tracked by Bloomberg.

Emerging Economies

MSCI Emerging Markets Index, which tracks 21 countries including Brazil, China, India, Russia and Turkey, fell 1.2 percent as of 4:48 p.m. in Tokyo today, while the MSCI World (MXWO) Index lost 0.6 percent.

The International Monetary Fund forecast the world economy will expand 4 percent this year and next on Sept. 20, compared with June forecasts of 4.3 percent in 2011 and of 4.5 percent in 2012. IMF said it based its forecast of a “modest pickup of activity” in advanced economies and of “robust growth” in emerging counterparts on the premise that European policy makers implement the measures to reinforce their bailout mechanism agreed on in July.

GPIF will probably remain a net seller in the fiscal year starting April 2012 to cover pension payments, Mitani said. The fund will sell fewer Japanese bonds this fiscal year from its portfolio than it sold last year as bonds reach maturity, he said. It sold 4.7 trillion yen worth of bonds in the fiscal year ended March 31, according to GPIF.

Investment Plan

Under a five-year investment plan set up in March 2010, GPIF will allocate about two-thirds of its assets to domestic bonds, 11 percent to Japanese stocks, 8 percent to foreign bonds, 9 percent to overseas equities and 5 percent to short-term assets.

The March 11 earthquake and ensuing tsunami that led to a nuclear crisis in Japan hasn’t affected its allocations, Mitani said.

“There is no doubt that the disaster affected Japan’s economy,” said Mitani. “But from a long-term investment plan perspective, it didn’t have any significant impact for us.”

GPIF lost 0.25 percent, or 299 billion yen, in the year ended March 31, as investments in Japanese equities and foreign bonds fell in value, the fund said in July. For the three months ended June 30, the fund returned 0.2 percent, or 240 billion yen, as investments in bonds helped offset losses in equities, the fund said in August.

Alternative Assets

The pension is the biggest in the world by assets under management, according to the Towers Watson Global 300 survey published in September, followed by Norway’s government pension.

GPIF has commissioned a study on alternative assets, such as hedge funds, real estate and private equity, as it seeks investments that will not be correlated to the fund’s traditional holdings of bonds and equities, Mitani said.

“Some say that other pension funds are investing in alternatives, but given the size of our fund, we have to be careful in making any decisions as the impact will be rather significant,” Mitani said.

The likelihood of European economies collapsing because of Greece’s sovereign debt problems is unlikely, given Germany’s economic stability, Mitani said. In the U.S., the key will be whether President Barack Obama’s proposals to spark the economy and trim the nation’s long-term deficit will be effectively implemented, he said.

“A fund like us cannot get too emotional over economic conditions and change allocations accordingly on a short-term basis,” Mitani said.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net.

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