The Ñ137 trillion ($1.1 trillion) Government Pension Investment Fund (GPIF), the biggest pension fund in Japan and the world, is reviewing its slate of international fixed-income fund managers.

Officials at the GPIF explain that the organisation has recently changed its international bond benchmark from the Citigroup World Government Bond Index to the Citigroup World BIG Index, adding areas such as credit and mortgage-backed securities.

The group has sent out RFPs to bond houses and intends to select a new roster by the end of the Japanese fiscal year, which ends in March, says Nobu Shimizu, director-general of the investment management department and an investment policy actuary.

Overseas bonds comprise 10.46% of the GPIFÆs total assets. As of end March 2006, the market value was Ñ7.55 trillion, of which 72% was managed on a passive basis and 28% on an active basis. The GPIF is targeting to reduce this allocation to 8% by the end of fiscal year 2008 (ie March 2009), however.

Any changes to external managers will most likely be felt in the active space. Currently the GPIFÆs active international bond managers are, in order of mandate size, Nomura BlackRock Asset Management (Ñ388 billion as of March 2006), Pimco, Goldman Sachs Asset Management, Fischer Francis Trees & Watts, Morgan Stanley Investment Management and State Street Trust & Banking (Ñ213 billion).

The passive managers for foreign bonds are Sumitomo Trust & Banking (Ñ1.47 trillion), BGI Trust & Banking (Ñ1.41 trillion), State Street (Ñ1.38 trillion) and Northern Trust Global Investments (Ñ1.2 trillion).

Bringing benchmarks up to date has been a priority for the GPIF over the past two years. Shimizu says once it has completed the review for overseas bonds, it will look at overseas and domestic equities.

Overseas equities, benchmarked against the MSCI Kokusai Index, account for nearly 15% of the GPIFÆs assets, while domestic equities (Topix) are 26%. The GPIF has yet to determine how to reorient these benchmarks, if at all. It intends to reduce overseas equities to 11% of AUM and domestic equities to 11% by end of FY2008.

Domestic bonds currently follow the Nomura Bond Performance Index, which already allows for corporate bonds with a credit rating of single-A or better. Shimizu says the GPIF has not decided whether this benchmark should be addressed. And any changes will likely be slow and careful, given the huge size of the GPIF in JapanÆs domestic bond market: it owns 8% of the Nomura BPI universe.

Currently 49% of the GPIFÆs assets are in domestic bonds. The organisation intends to increase this exposure to 67% by the end of FY2008.

For a detailed look at issues facing the GPIFÆs investment strategy, see the upcoming February edition of AsianInvestor magazine.