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Japan's $1.5 Trillion Pension Fund Lesson for Gold investing

Risk, reward and retirement savings...
NOW managing $1.5 trillion-worth of savings, Japan's national pension fund is the largest pension fund in the world, writes Adrian Ash at $3 billion gold investing platform BullionVault.
So you might guess that its fund managers know a thing or two about investing.
And they do. Two things in one word, in fact, as we'll see in a second.
But they don't know much about gold investing. Not yet. Luckily, they would like to know more!
Dow Jones' report on Japan's government pension fund wanting information on alternative assets, 19 March 2024
Lumping gold in with 'illiquid' alternative assets such as forestry and farmland shows just how much the GPIF still has to learn.
More on that below. But knowing what you don't is the first step to wisdom, or so everyone says. And now that it's seeking to understand gold, Bitcoin, farmland and forestry here in 2024, what is it that Japan's Government Pension Investment Fund already understands?
Two things in one word: Diversify. 
First, the GPIF splits its investment half-and-half between domestic and foreign assets, rather than buying only Japanese stocks and bonds.
Second, and instead of putting the pension savings of the world's oldest population into all stocks or all bonds, it splits that money 50:50 between shares and fixed income.
So far, so smart. The GPIF's policy of diversification has both smoothed and boosted total returns for Japan's pensioners and would-be retirees compared with holding just stocks or just bonds or with investing in a mix of only Japanese securities.
That's the Holy Grail of fund management, and of investing more widely.
Lower volatile. Bigger gains. Who doesn't want that?
But there's a third thing to know about diversification, a thing which the GPIF now wants to understand:
How to go beyond stocks and bonds.
This switch is already underway, because GPIF has in fact been investing in some alternatives since 2013. Latest data say it now exposes 1.4% of Japan's national pension savings to infrastructure, private equity and real estate – the 3 big mainstream alternatives it also names first in last week's request for information – with the aim of reaching 5.0% allocation sometime soon.
But for now, and just like for the vast bulk of pension funds worldwide today, stocks and bonds dominate the risk and rewards facing your retirement savings. So might squeezing in some alternative assets help? 
Here at BullionVault, we can't vouch for farmland or forestry, never mind Bitcoin. Sure, the crypto 'currency' has soared in price...
...boosting gains for anyone willing to buy and hold the hype across the past year, 5 years, decade or even longer.
But on the evidence to date, anyone wanting to spread risk from a portfolio holding equities should know that Bitcoin shows a positive and not insignificant correlation with US stocks.
Put another way, and on our analysis of the past 10 years at least, it has tended to rise when stocks went up, but it also fell when stocks went down. So while adding a little crypto might have juiced your total performance, it would have worsened your losses when the stock market fell, rather than working to offset those losses and smooth your returns.
That makes Bitcoin an intensifier, not a diversifier. Which is fine if that's what you want. But you'll struggle to explain it to your pension fund trustees. They want steady and safe, not sex and violence.
So what about gold?
Chart of Japan's GPIF total returns vs. Japan-only stocks and bonds, plus GPIF with 5% or 10% gold. Source: BullionVault
To repeat, Japan's national pension fund currently holds 4 buckets of investments.
It's split pretty much exactly 25% in each of Japanese bonds, Japanese shares, foreign bonds and foreign shares.
This spread means that, since the GPIF took its current form in 2001, it has...for instance...almost tripled its annualized return compared with investing only in Japanese government bonds.
But holding some of those bonds has also helped it soften the gut-awful 16% loss from Japanese stocks of 2018, never mind the 40% plunge of 2008.
Adding foreign assets in a 50:50 mix also means the GPIF has beaten holding only domestic Japanese shares and bonds, enjoying an extra 0.5 percentage points per year since 2001 on BullionVault's analysis.
That's despite the headline return from Tokyo's Topix share index beating global equities over the past decade (dividends included) with Tokyo stocks giving compound annual growth of 12.3% rather than 8.9% from the MSCI All Countries Weighted Index.
How come? Because of Japan's beaten-down currency.
Thanks to negative rates and monster QE money creation from the Bank of Japan, the Yen has sunk on the currency market, losing one-third of its value so far this century.
That means foreign shares have in fact returned 13.2% for Japanese whole percentage point per year ahead of the Topix.
Adding foreign shares and bonds can prove smart, in other words, especially when the central bank in your home nation resolves to weaken your currency with zero interest rates and relentless QE money creation.
But as our chart above shows, the GPIF could have done better again by adding a little or more gold, thereby enjoying its next-to-zero correlation with stocks or bonds.
Table of Japan's GPIF investment returns compared with 5% and 10% gold portfolios. Source: BullionVault
Of course, the GPIF is finally coming around to the idea of buying gold precisely as the shiny yellow metal runs to new all-time highs in all currencies. Not least gold priced in the Japanese Yen!
So a contrarian investor might worry that last week's news sounds a little like a clanging bell screaming "Top! Top!" for gold.
But maybe the GPIF isn't looking at gold as a diversifier. Maybe, alongside Bitcoin, it thinks gold could work to intensify its risk-return profile rather than smoothing it. Because, clearly, it doesn't understand much about gold at the moment...
...calling it illiquid rather than knowing how gold is one of the most liquid assets you can trade.
Either way, gold has to date never featured in anyone mainstream retirement funds. Physical bullion pays no interest or yield, and so it just doesn't fit with the logic of wanting to build a nice stream of income, ready to keep writing cheques to your pensionable members.
Cracking that market, and encouraging the trillion-dollar pension fund industry to put even a fraction of one per cent of its cash into gold, has long been a big ambition for the miners, promoters, dealers and custody providers of the gold industry.
Central banks, yes. They stopped selling and began buying gold as a group well over a decade ago. The result is plain to see today as gold prices set new all-time highs even with Western investors and traders taking profit and cutting their holdings.
Add some of that pension-fund a rebound in Western investment flows more broadly...and who knows?
Japan's GPIF request for information could make $2200 per Troy ounce look cheap in hindsight. Maybe.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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