The Government Pensions Investment Fund (GPIF), the largest in the world with $1.3trn of assets under management, is about to enact changes to its investment strategy which will favour equities over government debt.
The Topix and Nikkei are up more than 5 per cent since the news broke last month that the fund, almost the same size as the Spanish annual gross domestic product, was looking to equity markets amid a narrower scope for yield in fixed income.
Psigma’s head of global equities, Tim Gregory, says Japanese equities could be set for a huge boost because of the move, and suspects it may have already mobilised many investors to purchase equities.
“The move by the GPIF to apparently shift away from a significantly bond-dominated portfolio toward more domestic equities and foreign assets is highly significant,” he said.
“We think there is still a better than expected story in Japan that is not priced into the market, but there is also the benefit of the structural benefit of equity-buying by the GPIF.”
“The pension fund’s assets are really huge and the reality of that is that it will be an ongoing process to roll into equities for a considerable period of time.”
“However, we have already heard rumours – although not confirmed – that they have been actively been buying equities already.”
“Despite being loved last year, Japanese equities appear to have been shorted a lot recently by hedge funds.”
“However, we believe the GPIF has been buying quietly equities against this weakness, although we can’t be absolutely certain.”
“The market has clearly steadied recently. After being down in double digits six weeks ago, the Topix had 10 consecutive up days, the most it has had in years.”
“Since then it has halved its losses from 10 per cent to about 4 per cent year to date. So we think there is already a change in the market and they are absorbing foreign selling and hedge fund shorting.”
Gregory says this has led him to recently increase asset allocation to Japanese equities, adding to positions in the £471m Jupiter Japan Income and the ¥22,505 Lazard Global Active Japanese Equity funds.
Jupiter Japan Income, managed by Simon Somerville, has returned 49.02 per cent in local currency terms over the past three years falling short of the average return in the IMA Japan sector, which was 61.45 per cent.
It also failed to beat its benchmark – the Topix – which rose 63.59 per cent, over the same period. The portfolio is hedged against currency movements.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
The Lazard Global Active Japanese Equity fund has returned 13.81 per cent over three years, also failing to stay ahead of its FO Equity Japan sector average and the rise in its benchmark, the Topix
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
However, Jupiter Japan Income has accelerated ahead of the Topix and its sector over the past month, returning 6.99 per cent.
Both funds have approximately 98 per cent exposure to Japanese equities in their portfolios, with the remainder in held in cash.
Gregory says the recent introduction of a new index in Japan – the Nikkei 400 – will also boost Japanese equities.
“It is uniquely constructed. Instead of market capitalisation, 40 per cent of qualification for the index is a three year rolling return on equity calculation,” he said. “Importantly it appears that the GPIF will focus on this index for equity exposure.”
“Japanese companies are recognising that the GPIF only want to invest in those that are included in the Nikkei 400. They have to get themselves into a position where they are going to be included in that index.”
“There are more than 1000 companies that would qualify for that index but only 400 can get in, so there is a lot of competition for places and they will be trying very hard to improve their return on equity.”
“One of the most powerful drivers for the improvement in US equities has been that companies have been aggressively buying back shares and increasing dividends, in a fairly low growth world.”
Tony Lanning, who runs JP Morgan’s Fusion fund of funds range also recently added exposure to Japan, buying into the Polar Capital Japan, believing a falling market of late has presented a buying opportunity.
“We are bullish on Japan, where a difficult first quarter has cleared much of the froth out of the equity market,” he said. “We’ve been increasing exposure at lower prices.”
“We see scope for both earnings growth and valuation expansion and are not deterred by doubts over Abe’s third arrow or fears about the impact of the consumption tax rise.”
“Investors are increasingly skeptical over the effectiveness of Abe’s growth strategy, ability to generate inflation and engineer structural reform.”
“Despite the challenging start to the year, we retain conviction that Japan will reap the benefits of reform and are encouraged by signs affirming this.”
“Most importantly however, Japanese companies are increasingly focusing on shareholder value and profitability rather than their traditional model of pursuing market share.”
The Polar Capital Japan fund, managed by FE Alpha Manager James Salter, has also fallen short of both its IMA Japan sector average and its benchmark, the Topix, over three years.
Performance of fund, sector and benchmark
Source: FE Analytics
It has returned 15.8 per cent compared the average return in the sector of 21.9 per cent.
