After a tumultuous year in which Japan’s Government Pension Investment Fund (GPIF) managed to eke out a modest annual investment gain, questions are rising over whether the world’s largest pension fund will stick with its existing chief investment officer after his current term ends in September, or opt for a new figure.
On Friday (June 5) GPIF presented its latest annual report for the 2017/2018 financial year that ended on March 31, in which it revealed it had made a modest but appreciable annual return of 1.52% to take its assets under management to ¥159.2 trillion ($1.47 trillion), comparable in size to the GDP of Australia. That was a notable achievement, given it had suffered a record quarterly loss of $136 billion between October and December.
The fund and its stakeholders now have a big call to make, given that the term of executive managing director and chief investment officer Hiromichi Mizuno will expire in September. He has had a huge impact on GPIF’s investment strategy and structure since joining in January 2015, and sources familiar with the institutional investor told AsianInvestor that it could be crucial to GPIF’s future as to whether his appointment is extended.
One Tokyo-based investment adviser who is familiar with GPIF’s investment strategy told AsianInvestor, under condition of anonymity, that Mizuno has been pivotal to recent years’ transformation of GPIF. It was formerly a conservative and “quite bureaucratic” organisation that lacked a desire to seek new investment strategies and new investment themes, but has shifted into an organisation that has become willing to open itself to new investment areas and analytics, including the use of technology and environmental, social and governance principles.
To challenge the organisation’s old thinking Mizuno has shaken up investment strategies, escalating a revisionist process initiated by former GPIF president Takahiro Mitani, who worked with Mizuno at the fund before stepping down at the end of March 2016.
“After Mr. Mizuno came [to GPIF], their expertise was raised dramatically,” the adviser said. “I believe Mr. Mizuno [will] continue to work for GPIF, but if he doesn’t I hope the person who will take over has strong leadership [skills] and continue to make efforts to develop the organisation.”
Prior to joining GPIF, Mizuno was a partner of Coller Capital, a London-based private equity firm. He previously worked at Sumitomo Trust & Banking in Japan, Silicon Valley and New York.
Since joining, Mizuno has made concrete steps to improve GPIF's transparency. Since joining, the pension fund has improved the content and design of its investment result reports, making them “much better and more appealing” for external stakeholders, the adviser said. Indeed, AsianInvestor awarded GPIF for its improvements to governance in our 2016 awards.
In addition, Mizuno has increased the organisation's engagement with peers and a broader array of fund managers to help build its knowledge base, while greatly shifting its asset allocation. It has retreated from unprofitable domestic bonds and pushed into foreign assets, and even begun embarking into investments in alternative assets.
However, the ultimate yardstick to assess Mizuno's impact is likely to be returns. For all that GPIF is a heavily long-term investor, with horizons of 30 years or more, CIOs tend to get assessed on their organisation's annual performance.
In that respect GPIF had a mixed year. It reported an impressive quarterly return of 6.21% for January-March 2019, the last quarter of the last financial year. That brought its total annual return to ¥2.38 trillion.
Strong stock markets in early 2019 largely accounted for the strong end to the year. But that followed their collapse in the third quarter over worries about the US and China’s trade war and fears of a US interest rate hike. These market drops were the principal reason that GPIF ended up reporting an investment loss of 9.06% for that quarter.
The volatility of stock markets in the last fiscal year was addressed in the annual report by GPIF president Norihiro Takahashi, who succeeded Mitani in April 2016.
“At the end of 2018, the stock markets went down by investor risks hedging concerns about the world economy, the profit of companies, and the possible raise in the US policy interest rate,” Takahashi wrote. “In the end Federal Reserve Board put back the policy interest rate which calmed down the market. At the same time US stocks have come back up and the exchange of yen became low.”
Addressing the fund’s investment performance over the past financial year, Takahashi wrote that “this number is only temporary, as our organisation will not be affected by short-term market change and continue to gain the profit to leave the reserved fund to our next generation”.
Another Tokyo-based investment consultant familiar with Japan’s leading institutional investors said the widespread criticism that GPIF endured for its negative return in the third quarter of its financial year was “nonsense”, when viewed from its ultra-long-term investing approach.
The consultant noted that GPIF’s return of 1.52% would have underperformed a typical mixed equity-debt benchmark for the same period, which would have returned 1.92%. However he added that 38 of that 40 basis point difference was down to practical and legislative restrictions in how GPIF can invest.
The fund is required to use external fund managers, and has a legislatively determined investment portfolio asset mix, although it can move its asset allocations within certain ranges around this model.
“Their portfolio is huge, inflexible and difficult to move, so [quarterly negative results] can be regarded as inevitable,” the consultant said. He noted that GPIF’s return for the period stood above that of many other public mutual aid pension funds. Most of these pension funds consist of three tiers, with the first tier comprised of mirror funds of GPIF’s investment portfolio allocation.
Still, GPIF’s annual return for the 2017/2018 year sat well below its 3.03% annual average return since the 2000-2001 fiscal year. Senior officials at the Ministry of Health, Labor and Welfare and GPIF’s board are likely to consider these latest results when considering whether to stick with Mizuno or look for a new CIO.
An indication of the political climate in Japan, and thus the potential profile of a GPIF CIO, will be given on July 21, when the country conducts a regular election of 124 of the 245 members of the upper house of Japan’s parliament. The inadequacy of the country’s pension capabilities has become a heated political topic ahead of the election.
When talking to people with insights on GPIF, AsianInvestor was repeatedly reminded that the public pension fund receives enormous levels of scrutiny from its public stakeholders. The speed with which Japan’s retiree population is growing creates a low tolerance for performance failure.
Observers, fund managers, and peer CIOs will no doubt watch with great interest to see whether Japan’s political masters stick or twist on Mizuno. Will they continue to support his focus on long-term investment performance and transparency, along with an acceptance for more short-term volatility? Or will they decide an extension is untenable, given last year’s lacklustre investment performance?