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Japan pension 'whale' GPIF cuts stock holdings during rally

$1.6tn fund faces government pressure to hit investment targets

Japan's Government Pension Investment Fund has long been compared to a whale for its huge but elusive presence in the market.   © Reuters

TOKYO -- Japan's Government Pension Investment Fund, one of the world's largest institutional investors, has shifted to become a net seller of Japanese stocks as rising prices threaten to push it over a 25% portfolio weight target, estimates show.

The fund, which manages about 170 trillion yen ($1.62 trillion) in assets, sold around 500 billion yen of domestic stocks on a net basis in the July-September period, Masahiro Nishikawa of Nomura Securities said. GPIF appears to be a net seller in the current quarter as well, after acting as a net buyer during the first half of 2020.

Nishikawa's estimate would mark the biggest quarterly net outflow from GPIF's Japan stock holdings under the fund's current investment strategy, which includes the 25% domestic share target and dates to 2014. The Nikkei Stock Average rose 4% during the July-September quarter.

Called a "whale" for its huge but elusive presence in the Japanese stock market, GPIF has helped drive share prices higher with massive purchases. With the Bank of Japan slowing its buying of exchange-traded funds, the tide of public money flowing into the country's stocks may be shifting.

Domestic stocks totaled 24% of GPIF's portfolio weight at the end of September. When Japanese shares rise -- the Nikkei average hit a 29-year high on Wednesday -- the value of the fund's holdings grows even without additional purchases.

For his estimates, Nishikawa assumed GPIF has not traded Japanese shares since October. Price movements alone would put the fund's holdings at 45 trillion yen on Tuesday, for a weighting of 25.72%, according to Nishikawa's calculations.

The Nomura strategist thinks GPIF watches its asset allocation targets closely and has kept the Japanese stock weighting below 25%. Nishikawa estimates the fund sold hundreds of billions of yen in shares in net terms to maintain its target.

The fund's 2014 strategy change raised its domestic stock allocation to 25% from 12%. The move sought to generate higher returns than those on the Japanese government bonds that had made up the bulk of the portfolio.

GPIF now allocates 25% of its portfolio each to Japanese and international stocks and bonds.

The fund has an 8 percentage point leeway to either side of these 25% targets, so surpassing the target level does not require immediate asset sales. But GPIF's overseers at the Ministry of Health, Labor and Welfare urge the fund to secure returns exceeding the market average.

The composite benchmark that the GPIF uses to measure its investment performance is based on the asset weightings. The fund missed this benchmark for a fourth straight year in fiscal 2019.

The fund has less risk of missing the benchmark when it closely tracks the target asset weightings.

Under its plan for fiscal 2020 to fiscal 2024, the GPIF "has invested with a greater emphasis on the weightings," a person familiar with the fund's operations said. This suggests selling stocks when prices rise beyond current levels is likely to become an established practice for the GPIF.

The Bank of Japan, the second-biggest holder of Japanese stocks after the pension fund, has slowed the pace of its ETF buying. The central bank has made standard ETF purchases on only two trading days so far in November.

The central bank began ETF purchases in 2010, aiming to help achieve its 2% consumer price growth target. Its ETF holdings have grown to around 35 trillion yen. Critics say its huge, passive presence in the stock market threatens to undermine shareholder oversight on corporate management.

The BOJ seeks a way to slow its ETF purchases while continuing this policy tool.

GPIF announced its higher Japanese stock weighting on Oct. 31, 2014, the same day BOJ Gov. Haruhiko Kuroda unveiled additional monetary stimulus in what was described by some as a Halloween surprise. A change in stance by these two pillars would test the strength of the current rally by Japanese stocks.

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