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Shifts in Pensions

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The biggest fund in the world was the Japanese Postal Savings Fund in 1989. When we were called in to create a hedging program about 6 months before the high, it was Japanese Ministry of Finance who picked up the phone and asked that they did not do that for if they sold, they would make the Nikkei go down. The portfolio was US$1.2 trillion. No individual fund ever reached that level again. The hedge was not put on and the fund lost untold amounts of money. By 1999, I stood up in our Tokyo seminar and announced that that fund was insolvent. The government used that fund to try to support the markets until nothing was left and redemption became liabilities of government.

In Europe, pension funds have shifted their exposure to sovereign debt moving 71% to German bunds. In the USA, governments are enticing public pensions to invest in infrastructure in return the governments support the pensions for the time being. This they see as helping to reduce government expenditure so they can meet pension liabilities for their workers. The bond investors are buying “sovereign utilities” since they receive a dividend premium over the sovereign bonds and they see this as a clever maneuver toward securitizing their “sovereign” debt exposure. The problem with all government debt is that in reality it is the worst possible investment for it is unsecured. When a government defaults, there are no assets one can grab. Shifting to sovereign utilities makes sense where the pension fund can still pretend it is being “conservative” since it linked to the sovereign, yet have tangible assets behind the company.