Japan's Government Pension Investment Fund, the world's largest pension fund, lost 5.25 trillion yen in the July-September quarter, a return of minus 1.65%, as a sharp rise in global bond yields and a stronger yen hit its overseas bond holdings, according to a preliminary report the fund published on Friday.

The loss ends a strong stretch for the fund, which earned 16.47% in the fiscal year to March and a further 8.20%, or 24.09 trillion yen, in April-June. Total assets slipped to 314.39 trillion yen at the end of September from 317.76 trillion yen three months earlier. For savers across Asia, the result is a clear example of how currency moves can erase returns on foreign assets for a fund that reports in its home currency, a risk shared by many retirement portfolios in Hong Kong, Singapore and Seoul that hold U.S. bonds.

Foreign bonds take the biggest hit

Foreign bonds lost 6.52% in the quarter, or 5.23 trillion yen, almost the whole of the fund's net loss, GPIF's figures showed. The fund's benchmark for the asset class, the FTSE World Government Bond Index excluding Japan and China on an unhedged yen basis, fell 6.65%.

Two forces combined. Bond prices fell as yields climbed: the 10-year U.S. Treasury yield rose to 5.28% at the end of September from 4.47% at the end of June, and the 10-year German yield rose to 3.59% from 2.86%, according to market data in the report. At the same time, the yen strengthened to 157.14 per dollar from 162.53, and to 178.48 per euro from 185.82, reducing the yen value of overseas holdings.

Foreign equities lost 1.86%, or 1.46 trillion yen, matching their MSCI All Country World benchmark. The Dow Jones Industrial Average ended September at 50,906.05, down from 52,319.20 at the end of June.

Domestic bonds also fell, losing 1.80%, or 1.45 trillion yen, as the 10-year Japanese government bond yield rose to 3.07% from 2.68% over the quarter. That continues a run of losses on yen bonds: the asset class lost 5.11% in the fiscal year to March. Capital Times reported last month on weak demand at a 10-year JGB auction.

Japanese stocks the lone bright spot

Japanese equities returned 3.71%, or 2.88 trillion yen, slightly behind the 3.79% gain in the TOPIX including dividends. The index closed September at 4,108.65 points against 3,994.76 at the end of June.

The fund collected 1.30 trillion yen in interest and dividends during the quarter, which cushioned the market losses. Over the first half of the fiscal year, that income totaled 3.27 trillion yen.

For the first half of the fiscal year, from April to September, GPIF remains comfortably ahead. It has earned 18.84 trillion yen, a 6.42% return, led by an 18.73% gain in domestic stocks and 14.77% in foreign stocks. Both bond categories are in the red for the half: domestic bonds by 2.89% and foreign bonds by 3.59%.

Since it began investing in markets in fiscal 2001, the fund has made cumulative returns of 215.77 trillion yen, an annualized 4.83%, the report said. GPIF reminds readers in each update that quarterly figures are marked to market and that it manages reserves over a long horizon.

What the portfolio looks like now

The quarter left the portfolio close to its policy mix of 25% in each of four asset classes. At the end of September, domestic bonds made up 26.49% of pension reserves, domestic equities 24.80%, foreign equities 24.67% and foreign bonds 24.05%, all inside the permitted bands. The reserves figure includes about 5.4 trillion yen held in the government's pension special account. Alternative assets such as infrastructure and private equity accounted for 1.72% of the portfolio, well under a 5% ceiling.

Japanese workers do not see GPIF's quarterly swings directly in their benefits. The fund's returns feed into the long-term finances of the Employees' Pension Insurance and National Pension programs. Workers who hold their own market investments through iDeCo private pension accounts carry the same currency and rate exposures personally, and that plan is getting a higher contribution cap and older age limit from December.

The figures are preliminary and may change in the fund's annual report. The next quarterly update will cover October to December.