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An Interesting Test of Market Efficiency


Japan’s Government Pension Investment Fund (GPIF) is the world’s biggest state investor, trumping all other managed government retirement and sovereign wealth funds. Prime Minister Shinzo Abe’s drive to spur the Japanese economy out of its two-decade-and-growing economic slump, known as Abenomics, has pushed the GPIF to plow more money into risky investments, aiming both to stimulate the economy and finance pensions in the world’s most rapidly aging society.

Increased Domestic Investment

For instance, as part of a plan to boost equities to half its assets and shift more money away from Japanese bonds, Bloomberg reported that in the last three months of 2014, the GPIF raised its domestic stock holdings for a fifth-straight quarter, “adding a net 1.73 trillion yen, the most since 2009,” and “almost doubled net sales of Japanese government bonds to 5.56 trillion yen ($46 billion),” at that time “the most in Bank of Japan figures dating back to 1998.”

In addition to increasing its allocation to stocks (both domestic and international), the GPIF also announced in 2015 that it had picked Schroder Investment Management Ltd., Daiwa SB Investments Ltd. and Nomura Asset Management Co. to oversee Japanese traditional active investments and UBS Global Asset Management for its foreign active holdings.

In July, the GPIF unveiled its individual investments for the first time. An analysis from Bloombergrevealed that the pension fund is the top owner of more than 100 Tokyo-listed firms and a top-10 shareholder in about 99% of Japan’s biggest companies, “raising questions about whether GPIF should be less passive in its investments.”

Growing Active Assets

The GPIF’s recent disclosures also show it has been increasing the share of active management represented among its investments. Passive Japanese stock investments fell to 82% of the total at the close of March 2016, compared with 87% a year earlier.

This is an interesting test of the market’s efficiency. Certainly the Japanese government could favor the stocks it owns in the portfolio. And the government could alert its fund managers to changes in policy before making the announcements public. And what’s more, given the size of the GPIF, the government has leverage to negotiate the lowest fees and hire the managers with the best track records.

Unfortunately, despite all of the ostensible advantages, the market appears to be a tough competitor because, at least so far, stock picking hasn’t paid off for the GPIF. Actively managed domestic holdings underperformed its passive strategies by 0.3 percentage points over the past decade.

Despite the evidence as noted above, the pension fund has increased its allocation to actively managed funds. It appears that hope does spring eternal.

This commentary originally appeared October 31 on

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