Chikyoren in manager review

One of Japan''s biggest government pension funds is modernizing its investment policy.

The ¥15 billion ($129 billion) Pension Fund Association for Local Government Officials (PAL), known by they Japanese as Chikyoren, is embarking on its first significant asset rebalancing in 10 years, says Kimio Kiuchi, secretary-general.

This month the organization will dramatically increase its exposure to international fixed income and plans to hire three global bond specialists early this year.

Chikyoren, which was established in 1984, is the largest of Japan's mutual aid pensions, which together comprise ¥49.7 trillion in assets, along with funds for public school teachers, municipalities, policemen and the Tokyo metropolitan government. Its enrolment has been steady at around three million members, while its assets have risen steadily.

The bulk of its assets, 68.5%, go to domestic fixed income, because the organization is required by law to underwrite national and municipal government bonds, which comprise about half the portfolio. PAL manages Japanese bonds in-house, but outsources everything else.

Japanese government bonds once made up 80% of the organization's portfolio, but its managers have persistently lobbied the General Affairs Bureau to reduce this. This was typical for government funds, which have been used to finance the Zaitoh scheme of government loans and handouts to politically powerful interest groups, such as rural construction companies. The biggest source was the old Nenpuku, which has been restructured as the GPIF and has stopped this lending; ditto for the post office. PAL is therefore a relic and its managers are keen to put it on a more professional footing.

Today its asset allocation includes 13.5% to domestic equities, 10.5% to foreign equities, 3.5% to foreign bonds, 3% to cash and 1% to domestic convertible bonds.

PAL's goal is to cut domestic bonds, convertibles and cash in order to raise the global bond allocation to 10%, says Makoto Hirata, senior investment analyst in the fund management department. Hence it is looking for both active and enhanced-index managers, and may also increase mandates to its current passive managers.

In part this is to boost returns. "There is also a negative correlation between foreign bonds and domestic equities," Hirata adds. He says PAL is also considering hiring a forex overlay specialist, and is in talks with a few potential providers. In addition, PAL would like its specialists to have some flexibility in beating their benchmark, the Citigroup Government Bond Index, which may include permission to dabble in credit or MBS. The key is to meet PAL's nominal target return of 3.2% (or 2.2%, adjusted for inflation).

PAL's managers are not having it all their own way. Hirata says the management is keen to take advantage of cheap stocks, as it sees the Japanese market headed north. But the General Affairs Bureau doesn't like the idea of a pension fund investing in stocks, so its current allocation won't change much.

Similarly the organization is unlikely to venture far into the alternative space. It has less than 1% of its assets in alternatives, and isn't sure what part of the portfolio to place these in. Real estate and private equity look interesting, but it may be some time before the government lets PAL invest in these asset classes.

For more exclusive interviews with Japan's top government pension funds, see the December 2005/January 2006 edition of AsianInvestor magazine, which features updates with the GPIF and the Pension Fund Association.

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