(May 17, 2012) — A Japanese pension fund has become the first in the country to allocate to gold, albeit through an exchange-traded fund, in an effort to escape being hit by world economic troubles.
The Okayama Metal & Machinery pension fund has allocated 1.5% of its Y40 billion ($500 million) to a physically-backed ETF, the Financial Times initially reported.
Yoshisuke Kiguchi, Chief Investment Officer at the fund, said the move was to ‘escape sovereign risk’.
Japanese pension funds have traditionally invested in high-quality fixed-income, with a lesser allocation to other mainstream assets. According to Towers Watson’s asset allocation survey, published this year, some 59% of all assets in Japanese pension funds were fixed-income securities. This is the highest percentage of allocation to this asset class by any nation with a major retirement fund sector.
Japanese pension funds, on average, hold 80% domestic securities in their bond portfolios, according to Towers Watson. The average yield on a 10-year Japanese government-backed bond is around 1%.
Over the last 10 years, Japan has been the only country with a large pensions industry to see an aggregate drop in the level of its assets in local currency terms – despite the majority of funds being open defined benefit schemes. Assets fell by 0.7% over the 10 years to the end of 2011, Towers Watson said, mainly due to the poor domestic capital markets.
Although gold is a non-yielding asset, its safe-haven status has been desired by some during continued economic crosswinds.
Kiguchi said the pension fund trustees had been convinced of this investment decision as over the long term gold could result in being one of the ‘safe currencies’, the Financial Times reported.
Last week, gold hit $1600 an ounce as the Eurozone crisis continued to deepen, yet fell back shortly afterwards, despite no clear fiscal resolution in the region. This has led to some querying its safe haven status.