Japan’s public pension fund has struck a blow against short-sellers, declaring that it will no longer allow shares to be loaned out from its ¥80tn ($733bn) global equity portfolio.
The move by the world’s largest pension fund could prove hugely disruptive to equity markets if others follow the Government Pension Investment Fund’s lead and is part of its efforts to establish itself as an environmental, social and governance-focused investor.
People close to the GPIF said the initiative, which was led by Hiro Mizuno, the fund’s chief investment officer, encountered a range of internal objections and remains divisive.
The GPIF said it was concerned that lending stocks out stopped it exercising proper stewardship over the underlying investments. This included a lack of transparency over the final borrower and how it was using GPIF shares. Should these concerns be addressed, said the fund, it will consider lending stocks again.
GPIF will continue to lend securities from its bond portfolio. Traders wishing to short- sell shares, betting on a fall in the price, must first borrow them from their owner.
The decision will incur a direct financial cost to the Japanese fund. According to the GPIF’s annual report for the 2018 financial year, it made a net $300m in fees from lending shares that sit in the domestic and foreign segments of its portfolio.
After a series of readjustments in recent years, the proportion of Japanese and overseas shares have been raised to a combined 50 per cent of the GPIF’s $1.6tn asset portfolio.
Under Japanese rules that prevent the GPIF holding or voting on individual stocks, the administration of the fund’s equity holdings is entrusted to a broad range of outside asset managers. Several of them have said they have come under intensified pressure from Mr Mizuno to push companies harder, particularly on governance issues.
Traders in Tokyo said the immediate risk the GPIF’s decision posed to markets is that other asset managers may feel obliged to follow its lead in effectively branding the practice of short selling as “non-ESG”.
However, others argue that despite the huge symbolism of the GPIF’s move, it is unlikely to have an immediate impact on market fundamentals. Although the GPIF is the leading holder of Tokyo-listed stocks, that position is on track to be overtaken in coming months by the Bank of Japan and its ¥6tn-a-year exchange traded fund buying programme.
The BoJ holds just under ¥30tn of ETFs and said in October it was considering lending its ETFs to brokerages.
There are numerous aspects of securities lending that can present issues for ESG-minded investors. For example, if a stock is out on loan, the voting rights go with it, which means the asset owner cannot engage with its portfolio companies.
Asset owners also typically have little say over what happens with their securities once they are lent out. Many investors are concerned their securities will be used for tax evasion purposes.
However, there are steps investors can take to avoid both of these scenarios that still allow them to participate in securities lending, said Andrew Dyson, chief executive of the International Securities Lending Association, a London-based trade group. Many asset owners have provisions in their lending policies that require their securities to be returned for voting purposes. To sidestep tax-evasion problems, asset owners can choose to not lend out any securities close to their dividend date, he said.
Mr Dyson added that securities lending is critical to properly functioning markets. “Securities lending is one of the tools available to make sure capital finds its rightful place in the economic model,” he said. “I would argue [short selling] is no different from a fund manager over- or underweighting an index they are participating in.”