The Way Of Diversification

Japan's pension fund assets lose value

Image source: Nick Pecker, Peter Krejzl, Neveshkin Nikolay, Martin Hejzlar, jonanderswiken, AnnaSmirnova - Shutterstock

What's going on?

This week, the world’s largest pension fund revealed its stock, bond, and currency investments all followed one another and lost money at the end of last year.

What does this mean?

A “diversified portfolio” – comprising stocks, bonds, and more – is a good way to offset any losses in one asset (say, stocks) with gains elsewhere (like bonds). And by rebalancing regularly, a typical investor should do well over time. But that didn’t hold true for the Japanese government’s $1.5 trillion pension fund late last year…

Investors seemed worried about (among other things) the US Federal Reserve raising interest rates this year, which could slow economic growth. And in their skittishness, they threw their investment babies out with the bathwater. Investors indiscriminately sold off stocks and “fixed income” investments and bought safe haven currencies – including the Japanese yen, whose value rose. Unfortunately for Japan’s pension fund, that meant its global investments were worth less after being converted back into yen.

Why should I care?

For markets: Japan is over mainstream investing.
Japan’s pension fund is now increasing its proportion of “alternative” investments – real estate, private equity, art and so on – to guard against a repeat performance. These sorts of investments don’t typically fluctuate with broader financial markets, which should help protect and grow their investors’ wealth. But some investors are sticking to more conventional tastes: on Wednesday, Norway’s $1 trillion oil fund revealed almost 70% of its cash is in stocks – a record high.

The bigger picture: The yen’s not feeling zen.
Investors are clamoring for Japanese yen partly because of the country’s already-negative interest rates: Japan’s central bank has precious few ways to weaken the currency’s value and make its exports appear cheaper (compared to the US, where rates are likely to be cut next month). One option might be to sell off its stock holdings: the Bank of Japan has come under criticism for owning 80% of the country’s stock exchange-traded funds.

Originally posted as part of the Finimize daily email.

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