December 4, 2019 / 11:54 AM / 12 days ago

Japan pension giant's war on short sellers will have only limited effect - analysts

TOKYO, Dec 4 (Reuters) - The decision by Japan’s Government Pension Investment Fund (GPIF) to suspend share lending to short sellers will not improve corporate governance or affect global liquidity and could just cost the fund money, analysts warned on Wednesday.

The change announced on Tuesday and motivated, GPIF said, by its “stewardship responsibilities” was cheered by critics of short selling, including Tesla chief executive Elon Musk.

As the world’s largest pension fund, GPIF is closely watched because changes in its policies and its 160 trillion yen ($1.47 trillion) portfolio can have wide ranging effects in global markets.

Nicholas Smith, Japan strategist for CLSA, questioned targeting short selling.

“People that don’t understand it [short selling] think it’s this evil practice that benefits from bad things happening.

“The other people who benefit from bad things happening are buyers of bonds, and they don’t get the same kind of hate mail.”

Short sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them, pocketing the difference.

Advocates see them as a healthy counterbalance to investor over-confidence and corporate spin. Critics argue they are destabilising because they have an incentive to drive down a company’s share price.

GPIF earned 37.58 billion yen in fees from lending shares from its foreign equity portfolio over three years to the end of its 2018 financial year. The policy change cuts off that income source and reduces the amount of overseas shares that can be used by short sellers.

The pension giant has 42.5 trillion yen in its foreign equities portfolio. As big as those holdings are, they likely won’t “move the needle” in terms of liquidity in the global market, Smith said.

But there could be an impact in smaller markets. Brian Freitas, an analyst who publishes on Smartkarma, estimates about $7 billion of GPIF’s lent out shares may be in emerging markets. If those shares are recalled under the policy change, “there could be some big moves in smaller stocks,” Freitas wrote.

The Japanese market is relatively quiet for short selling. Muddy Waters Capital LLC, which became famous for targeting Chinese companies, announced last month it was betting against Japanese biotech PeptiDream Inc, only its second announced play in the country.

GPIF said lending out shares also transferred ownership rights temporarily. And that gap may be “inconsistent with the fulfilment of the stewardship responsibilities of a long-term investor.”

That argument doesn’t hold water, CLSA’s Smith said, because GPIF is effectively a giant exchange-traded fund that buys every share and doesn’t directly vote as an investor.

“If it were like the Canadian pension plan and picked its own stocks and voted its own holdings then it would have been an issue,” he said.

“They are the market’s marginal buyer of companies that shouldn’t be listed.” ($1 = 108.6400 yen) (Reporting by Rocky Swift Editing by Alexandra Hudson)

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