Government Service Insurance System (GSIS) President Robert Vergara, keen to shore up returns at the Philippines’s biggest state pension fund as bond yields slump, is considering selling paintings hanging at the national museum.
The GSIS may put around 100 works by Philippine artists, including Juan Luna and Fernando Amorsolo, up for sale over the coming 10 years as local consumers become more wealthy, Vergara said in an interview in Manila. The $20-billion fund targets returns of at least 8.5 percent to meet obligations to the 1.4 million workers whose savings it manages and has generated between 9 percent and 12 percent over the last three years, he said.
“We do believe that art is best left to collectors as opposed to a pension fund,” he said. “The collection is not something that generates a return on its own.”
President Aquino’s efforts to cut budget deficits and curb corruption have won four credit-rating upgrades from Standard & Poor’s since he took office in June 2010, prompting an almost halving of sovereign bond yields. The GSIS, which has 45 percent of its assets invested in debt, is increasing returns by boosting equity holdings, investing in railways, selling some real estate and farming out cash to top-performing funds.
The pension fund raised investments in longer-dated debt in 2010 and 2011 to take “the full benefit of the drop in rates,” Vergara said in a telephone interview on Friday.
Philippine local-currency sovereign notes have returned 5.1 percent this year, the least among Southeast Asian emerging markets after Malaysia, Bloomberg indexes show.
Returns have dropped from 17 percent in 2011, 11 percent in 2012 and 8.6 percent in 2013. The yield on the 10-year government paper fell to 4.13 percent on Thursday from 7.93 percent at the end of June 2010. Similar-maturity debt from Indonesia yields 8.09 percent.
The most valuable painting in the collection is The Parisian Life, an 1892 oil on canvas by Juan Luna that the fund bought for P46 million ($1 million) in 2002, according to the GSIS web site. It is probably worth around P60 million, Regina Mercedes Cruz, a curator at the Bangko Sentral ng Pilipinas Museum in Manila, said in an interview on Thursday. The paring of the art collection will take into account more than just price, as the collection is “part of our cultural identity,” Vergara said.
Some 28 percent of GSIS assets under management consist of loans to members, 17 percent is in stocks and the remaining 10 percent includes categories like property and art, said Vergara, who was appointed by Mr. Aquino in 2010 and previously worked as a fund manager at Morgan Stanley Asia Ltd.
While government debt has been giving “relatively thin” returns, the fund intends on keeping its bond holdings at around 45 percent of its portfolio because of risk and liquidity considerations, he said. The government will allow state-controlled bodies including pension funds to start trading debt in the secondary market, adding around P800 billion to the pool of tradable notes, Treasurer Rosalia de Leon said on September 22.
“Philippine bond yields are still at the lower end relative to other countries in Asia,” Raymond Lim, the Singapore-based head of Asian debt at Amundi Asset Management, which oversees $1.1 trillion globally, said in an interview on Thursday. Amundi is underweight Philippine bonds and the peso this quarter, he said.
The Philippine economy has expanded by more than 6 percent in all but one of the 10 quarters through June, official data show. The growing affluence in the country makes it a good time to sell the paintings, Vergara said.
Vergara said he aims to raise the portion of the portfolio invested in equities from around 17 percent to 20 percent to take advantage of the local stock market’s strong performance. The benchmark share gauge has surged 22 percent this year. The country’s stocks are volatile though, swinging from a 44-percent loss in 2012 to a 1.5-percent increase last year.
“We will probably do something from the middle of next year to go out and cast a wider net to see who’s doing well,” and allocate money to them, Vergara said. The amount of assets invested locally will be maintained at 99 percent, he said.
Bangko Sentral ng Pilipinas raised its benchmark interest rate twice this year, in July and September, to 4 percent and the monetary authority will increase it to 4.25 percent by the end of 2015, according to the median estimate of analysts surveyed by Bloomberg. Inflation reached 4.9 percent in July and August, the fastest in
almost four years, before easing to 4.4 percent last month.
“The fundamentals still point to lower interest rates,” Reynaldo Montalbo, head of treasury at First Metro Investment Corp. in Manila, said in an October 29 interview. “Returns have room to fall. That’s why, for investors, government securities are not really an attractive investment alternative.”
A weakening peso has also dimmed the allure of peso bonds. The Philippine currency has been the worst performer among Southeast Asian emerging markets this year, declining 1 percent. That compares with gains of 0.9 percent and 0.7 percent for the Thai baht and Indonesia’s rupiah.
Generating sufficient returns is becoming more important as the average age of GSIS members rises closer to retirement age and the proportion of Filipinos supporting older family members declines, Vergara said.
“You’ll die of high blood pressure if you worry too much about what one year’s return is,” he said. “Markets do not generate returns in a predictable smooth manner. The idea is by putting together different asset classes you smooth that return.”
Bloomberg News