GPIF CIO: Global Synchronicity is Killing Diversification

CIO of world’s largest fund says no place for investors to hide in downturn.

The chief investment officer of the world’s largest pension fund has warned that global markets are “so linked” that it has become nearly impossible to hedge investments through diversification to protect portfolios in case the markets head south.

Hiro Mizuno, CIO of Japan’s $1.46 trillion Government Pension Investment Fund (GPIF), made the comments at a recent California Public Employees’ Retirement System (CalPERS) board meeting. Mizuno was invited to be the keynote speaker at an investment education workshop being held by the CalPERS investment committee.

Mizuno said that during the fourth quarter of 2018, GPIF reported a mark-to-market loss of an astounding $150 billion. That loss for those three months alone, he pointed out, was larger than the total market value of all but probably the five largest pension funds in the US.

“I’ve never seen in my whole career as an investment professional every single asset class we lost money,” Mizuno said. “Conventional wisdom of the portfolio diversification is that when we lose money in equity, we make profit in fixed income,” he added. “But we lost in every single asset classes and we also lost in a currency translation as well. It never happened in the past.”

He also said that the reason every asset class went in the same direction is because the global markets are too much in synch.

“The global market is so linked,” he said. “When we wake up and find the New York stock market has plunged, everybody expects that the Tokyo market will go down as well.”

He said that it used to be that global diversification would make it so that when the New York markets would go down, the Tokyo market would go up.

“That’s what’s really concerning to me,” he said. “Whether the conventional wisdom of portfolio diversification will save us.”

He added that it’s no wonder so many investors are trying to increase their asset allocation to private assets and private investments—because they’re not correlated to the public market.

In addition to the global synchronization and its effect on diversification, Mizuno also touched on other topics, including how artificial intelligence (AI) will affect the economy.

Mizuno warned that “AI is going to replace a lot of jobs,” though he added that this didn’t necessarily mean AI would be bad for society. He pointed out that when the car was invented, a lot of horse owners were probably concerned, but that in the end, society benefited from the introduction of the automobile.

“So I don’t know, we may benefit from AI but for the time being, we will see the difference in that some people will win and some will lose,” he said. “But the impact of AI in business is going to be more significant than people think.”

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