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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 27 / 33





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Some further diversification of the GPIF should at least be considered. As Mitchell et al (2008) summarize: ―As nations grow increasingly aware of obligations in the form of promises to their aging societies, this too prompts the need for more sophistication with regard to trading off equity premium on a global scale vs. the shortfall risk of a system running out of money. In sum, publicly managed fund fiduciaries must become increasingly aware of the rationales for better investment performance, the value of international diversification, and the opportunity costs of more aggressive investment.‖22

The GPIF and the MHLW should fully consider whether the fund‘s portfolio is really as low risk as they it seemingly think, and whether the scale and long-term nature of the fund would allow it to invest in longer term, lower liquidity asses (such as infrastructure and private equity) which could generate low correlated returns. The GPFI could use the size of the fund as an advantage (e.g. even a 1% shift in its portfolio represents a large absolute amount of assets), having the capacity to build up such expertise in- house, allowing the GPFI to access assets with a liquidity premium.23 24


Mitchell et al (2008) note that a 1% increase in returns from 3% to 4% could expand the GPIF final reserves by 11x as of 2100


Usuki (2002) also makes the point that Japanese households have a low exposure to risky assets, so that the GPIF could represent an efficient, collective mechanism for gaining such exposure and increasing scare risk capital in the country (NB the opposite argument can be posed in relation to the Social Security Fund in the USA).


―A recent study of Canadian pension funds found hat greater reliance on in-house investment management has brought about stronger performance. In the past decade, 9 Canadian public sector pension funds returned an average of 5.5% per annum while their 8 largest US counterparts which employ outside managers more extensively – gained 3.2% annually.‖ See (Wong 2010).


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