Japan's Government Pension Investment Fund

Business Money
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Japan’s Government Pension Investment Fund, the largest fund for state employees in the world, increased its equities allocation, as follows:

  • allocation of Japanese stocks increased from 12% to 25%
  • allocation of foreign stocks increased to 25%
  • allocation of foreign bonds increased to 15%
  • allocation of Japanese bonds reduced from 60% to 35%

In other words: looking for more yield which requires taking more risks.

There is the rhetorical question of who will bear the consequences if anything goes wrong (higher risk means: higher likelihood of financial loss).

There perhaps more interesting question is why this change in policy, which Prime Minister Abe has been urging the fund to implement.

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Simple, there is a general lack of liquidity in the market which makes it difficult for rich people to make more money through speculation.

This is one way of bringing in more money into the game… as always the rich guys will win and the gap between median income and the wealthy will continue to increase. The game is rigged, and that’s not taking into account all the rate setting fraud banks have been fined for this year (not including the home mortgage fraud).

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Why? Risk is based on many factors, not just yield. It’s far more nuanced than a simple inverse relationship. It absolutely is possible to get higher yields while at the same time reducing risk. It’s also possible to get a lower yield while increasing risk, and everything else in-between. I’m not saying that’s what the fund is doing, but for people to just assume that by increasing equity exposure within their strategic asset allocation, that it automatically means they are taking on more risk is just not true.

So the more interesting question is, why do YOU think this fund’s new strategic asset allocation is more risky?

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Risk is based on many factors, not just yield.[/quote]
Right. You will notice that i have not said anything top the contrary. :slight_smile:

Most things are not simple, especially not in the realm of financing. I assume there is a complex inverse relationship.

I can imagine such possibilities. As regards Japan: do you have any indication that what the fund is doing means increasing yield while reducing risk?

Automatically? I am talking about Japan. :slight_smile:

You have a yield increasing risk reducing investment strategy for them?

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Japan’s Government Pension Investment Fund has been looking to get out of its heavy reliance on Japanese government bonds without anyone noticing for some time. It was no coincidence that it announced it was reducing its historic allocation of government bonds from 60% to 35% on the same day the Japanese central bank announced Keynesonomics was going into warp drive in an all out bid to escape Japan’s deflationary black hole. In the process the central bank will be buying up 70% of Japan’s new public debt, giving insiders like the GPIF a perfect opportunity to unload their increasingly risky JGBs.

“Our view is that holding JGBs with coupons of 0.5 per cent presents a significant risk in itself.” – Takatoshi Ito, former chair of committee advising the GPIF on its portfolio reallocation and current deputy chair on reforming the GPIF’s governance

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Again, this is a false assumption. There are many ways to get a higher yield while lowering risk, but the financial industry has done a tremendous job convincing people that there is a somewhat linear relationship between risk and reward. That increasing expected yield will mean increasing expected risk. It’s not true, but they do this because it’s easy. It means they can just have 3 or 4 pie charts of various allocations and they can label them from conservative to risky. 99% of financial advisors are salesman, not traders. It’s very easy to sell products that can be labelled and understood by everyone, but at the end of the day their conclusions are still based on a false premise and therefore should be ignored.

Yes, and it doesn’t even have to do with the actual assets they are adding. The simple act of reducing correlations will increase long term expected yield while reducing expected risk. Reducing the 60% allocation in Japanese bonds and allocating that money into several other assets classes would achieve the goal. The fact that they are choosing foreign bonds, foreign stocks, and Japanese stocks is just up to the fund manager. I’m sure there are plenty of more efficient ways to allocate that money, but the change is better so in that sense it achieved their goal. The new allocation is better than the old one. Would you want to be holding 60% Japanese bonds right now?

As a matter of fact, I do :slight_smile: But the financial industry isn’t interested in what I do because my strategies involve actually maximizing returns while minimizing risk, ie making people real money they can spend. The financial industry has the world on lock. Skimming management fees without actually having to return any significant money to investors. What a perfect situation, why change it? It’s completely self serving and has been working for decades. I can’t imagine they are interested in changing now. Why compete with each other for the best returns? That would mean some winners and some losers. If they collude, all returns come in around the same amount and everybody in the industry wins. Clients don’t leave because there is nowhere else to go, so they just split the world’s investable assets between themselves. Everybody eats, and they don’t even have to do any real work, it’s perfect :thumbsup: