Japan’s Mammoth Pension Fund Will No Longer Lend Shares to Short Sellers

Japan’s Government Pension Investment Fund (GPIF) feels a pang of ESG conscience and bans lending its foreign holdings to bears.

The GPIF fund will lose a small but lucrative stream of revenue from stock lending. It said the practice of stock lending lacked transparency. That’s because the identity of the ultimate buyer and their intentions are not known, the fund said.

GPIF’s move is said to be triggered by environmental, social and governance (ESG) considerations, and the resulting need to improve its image as an investor.

However, this is a fresh setback for the much-maligned fraternity of short-sellers. Already facing resistance in many countries, they would be denied a supply of shares that could enable them to sell companies short. Worse, the GPIF’s move could set off a chain reaction that could lead to short-selling being labeled as a “non-ESG” practice.

Further, other institutions and funds might follow the GPIF’s example. If that happens, it could cause turmoil in the global equity markets.

But, what’s the cost of an easy conscience?

GPIF holds foreign equities worth 42.5 trillion yen ($391.20 billion) in its portfolio. GPIF, therefore, earned 37.58 billion yen ($345.91 million) in fees from stock lending over three years to the end of its 2018 financial year, according to Reuters. The fund would now lose that stream of income.

However, GPIF will continue to lend securities in its debt portfolio.

GPIF’s ban on stock lending not healthy for capital markets

According to a different view, stock lending is essential to facilitate short-selling. Short selling protects markets from becoming over-enthusiastic (read: “irrational exuberance”) and limits bubble-like moves that could trap everyday investors.

Andrew Dyson, chief executive of the International Securities Lending Association, feels that stock lending is essential to smoothly functioning markets. “Securities lending is one of the tools available to make sure capital finds its rightful place in the economic model,” he says.

Musk is over the moon

Meanwhile, short-sellers have been Elon Musk’s nemesis. His running battle with Tesla bears is the stuff of capital market folklore. According to MarketsInsider, which quoted S3 Partners, Tesla’s short interest of $9.5 billion is one of the largest in the US market.

Expectedly, Musk welcomed GPIF’s ban on stock lending with a delighted tweet:

[Musk spars with short-seller David Einhorn on an ongoing basis. Read about the saga of the “short shorts” here]

[Related Story: Hiro Mizuno: “No place to hide” as markets move in lockstep  ]

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December 6, 2019

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