Traders closely study how pensions funds, controlling $73 trillion, plan to spend their firepower. But lately, the industry’s biggest whales are creating outsized dislocation and trepidation in global currency and bond markets. The excessive market scrutiny and speculation that big pension funds are attracting now demands a rethink in portfolio management.
An unusual meeting at Japan’s Government Pension Investment Fund, or GPIF, in late August has sparked speculation that the $2 trillion manager will increase its current 25% allocation target for domestic bonds. Days later, Norway’s sovereign wealth manager proposed an overhaul of its government bond portfolio, potentially offloading US Treasuries but increasing holdings of Japanese debt because of a technical change in how the fund measures the market.
These separate but related developments have propelled a strong rally in the yen, creating a tricky situation for the Bank of Japan. Anything short of a hawkish hike at its meeting next week can be met with rapid selloffs in the country’s currency and sovereign credit.
It doesn’t have to be this way. When it comes to being on the frontier of investing, GPIF can certainly learn from America’s largest public pension program, the California Public Employees’ Retirement System, or CalPERS. In July, the $637 billion fund formally adopted the so-called “total-portfolio approach,” or TPA, making it the first US pension fund to do so.
By going with TPA, CalPERS has ditched rigid allocation bands to stocks, bonds and alternative investments. Instead, the fund will pursue a bottom-up approach to achieve the best returns possible. CalPERS notched a handsome 14.8% in the fiscal year ending June. But with a funding ratio of 85%, the system still doesn’t have enough assets to meet the future liabilities to more than 2 million members.