Sadayuki Horie, senior researcher at Nomura Research Institute
International asset managers have good reason to be enthused by structural changes under way at Japan’s Government Pension Investment Fund (GPIF), which manages the world’s largest retirement savings pool.
The $1.3 trillion fund announced an overhaul of its equity portfolio this month. It added three benchmark indices for passive investment to include the JPX-Nikkei 400, launched by the Japan Exchange in January and comprising firms selected for higher return-on-equity and profits.
GPIF also unveiled* 14 active and 10 passive investment managers, of which eight had existing mandates from the fund; moved into smart-beta investing; and started to make both passive and active investments into Japanese real estate investment trusts.
Moreover, GPIF has pledged to introduce a performance-based fee structure for active managers, to replace its fixed-fee approach. The fund paid fees to domestic stock managers equating to 0.04% of the assets they oversaw in the year to March 31, 2013, by Bloomberg data.
Changes to GPIF’s asset allocation are expected to be announced after June, once Japan’s health ministry has completed its five-yearly review of public pensions. It is worth noting that such changes could be adopted by Japan’s broader public and corporate pension fund industry.
Sadayuki Horie, senior researcher at Nomura Research Institute and a member of the panel set up to recommend changes to management and governance of Japan’s public pension funds, sees the changes as positive.
“Fees for Japanese pension funds management are extremely low compared with global standards,” he says. “Experts say this is one reason why we are not able to attract good managers, and that in turn is hampering improvement in returns. I completely agree.
“The current level is extremely low," he adds, "but going forward managers who outperform will be paid a performance fee so that both parties can grow.”
Interestingly, Horie says that, in general, overseas fund houses have privately been more positive than domestic firms about the change to a performance fee structure. “Managers who are less confident [in their ability to outperform] are not all that welcoming [of the move],” he notes.
“But the process is good, because managers that are no so good will be weeded out. The [selection] process will become clearer and more effective in that way. Generally speaking, I think these changes should be welcomed by managers.”
Horie adds that GPIF has already altered its selection process for managers, not only looking at performance now, but also placing more weight on the investment process. “It is the repeatability of the investment process [to maintain track record] that is the focus on attention, I hear.”
On GPIF’s investment strategy, Horie says he would like to see the pension fund drop the Topix as a benchmark entirely on the grounds that its capital productivity is low.
While GPIF has expanded the list of indices it uses to include JPX-Nikkei 400, MSCI Japan and Russell Nomura Prime, it is sticking with Topix as the main benchmark.
But Horie suspects that use of Topix is one factor behind GPIF’s low returns, although he declines to be drawn into a cause-and-effect argument. He sees the role of a public pension fund as improving beta, not enhancing alpha. “I think GPIF should be responsible for higher beta for the Japanese stock market overall,” he argues.
He also points out that GPIF has set its annual return target at 1.7% plus wage growth, only marginally above the 1.6% set five years ago. As such, those calling for a significant increase in GPIF’s equity exposure may be in for a disappointment.
“The necessity to become significantly more risk tolerant does not exist,” he notes. “The targeted rate [1.7%] is not being set at such a high level.
“GPIF’s [future] risk tolerance has not been determined yet – only its target return, which could be achieved with the current risk tolerance level. I don’t personally think there will be a significant increase in equity allocation.”
In fact, GPIF will set out to reduce its fixed income holdings, which stand at 55% of its asset base. It has committed to investing ¥280 billion ($2.7 billion) into infrastructure over the next five years, and is expected to start investing into real estate – assets designed to generate a regular income stream. Horie is expecting this to be rolled out over three to five years.
* GPIF’s list of domestic equity investment managers are Eastspring Investments; Invesco Asset Management (Japan); Capital International; Seiryu Asset Management; Natixis Asset Management (Japan); Nikko Asset Management; FIL Investments (Japan); Mizuho Asset Management; Russell Investments Japan; JP Morgan Asset Management (Japan); and Diam.
The pension fund's smart-beta managers are Goldman Sachs Asset Management; Nomura Funds Research and Technologies; and Nomura Asset Management.
The passive managers are Diam; Sumitomo Mitsui Trust Bank; Mitsubishi UFJ Trust and Banking; BlackRock Japan; and Mizuho Trust and Banking.
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