Japanese pension funds are having to think hard about their future in-house investment capabilities as they increasingly diversify into overseas markets. The key question facing them: how much to support strategies for managing their own investments and how much to oversee investment mandates with external managers?

That was the message from Yoshi Kiguchi, the chief investment officer (CIO) of the Okayama Metal & Machinery Pension Fund and West Japan Metal & Machinery Pension Fund, during an on-stage interview at the AsianInvestor’s Institutional Investment Forum in Tokyo on June 18.

Yoshi Kiguchi

“There are two approaches to the CIO role and the institutional investment role; the investment method and the organisation,” Kiguchi said. “As an investment professional, the question is whether you are going to manage the organisation as an investment professional, or is the organisation going to manage the investments?”

Kiguchi, a former investment consultant turned CIO, explained how Japanese financial institutions and public pension funds have historically tended to have an investor-led approach when investing in equity and fixed income.

But these government-modelled organisations have cost and hiring barriers to contend with when trying to grow their investment teams and capabilities, which make it harder when it comes to diversifying by geography and asset type.

“Frankly speaking, the public pension funds have many limitations. For them, there are two directions,” Kiguchi said. “One is to work within the limits and another is to break the limitation.”

He said public pension funds could aspire to be more like a foreign investment advisory type of organisation, with a collection of investment professionals hired from the outside and compensated well for their performance. 

GPIF'S EXAMPLE

Such an evolution has been seen somewhat at Government Pension Investment Fund (GPIF), the world’s largest pension fund with assets under management of  ¥150.7 trillion ($1.4 trillion) as of the end of last year, after it posted a record loss in its third quarter

GPIF has recruited renowned Japanese investment professionals with overseas capabilities from investment firms to spearhead asset type-specific strategies within alternatives investments.

“In that type of organisation, the important capability from the CIO to recruit and headhunt from the outside is important, rather than focusing on investments himself,” Kiguchi said. “You need to have strong leadership and management capabilities to be able to manage people with very strong professional pride. Inter-organisational communication is also important.”

Contrary to some major public pension funds overseas, and some of the larger Japanese insurers, Japan’s public pension funds have yet to grow their investment capabilities through the acquisition of private investment firms.

Kiguchi said their conservative nature and the tight cost controls have so far prevented such acquisitions. So the industry's recently recruited investment professionals still rely on external investment managers and have to be patient when it comes to building their in-house capabilities, as for instance in the case of GPIF’s alternatives division

MOULDING A CIO

While some Japanese public pension funds can be assertive and controlling in their CIO role, the country's corporate pension funds are less likely to manage investments by themselves. This is largely because they tend to have small in-house investment teams and capabilities, so they choose instead to delegate capital to fund managers they think more capable.

“Selecting the right fund manager is their role. So for those people, their role is to control the investment management,” Kiguchi said.

Not all corporate pension funds recruit specialised investment professionals for the CIO role. Instead, they recruit capable candidates from elsewhere in the corporation, often with experience in general trading and from overseas postings.

An example of this is the Aisin Employees' Pension Fund (Aisin), where soon-to-be former CIO Hisashi Hatta was recruited from a role overseeing production in the US for 15 years.

His successor at the automatic car transmission maker's pension fund will likewise be recruited from elsewhere within the corporation, Hatta told AsianInvestor last week in a separate interview.

Aisin is unlikely to be an isolated case. Other Japanese companies will also, in all probability, still prefer to train and hire internally for the CIO role, Kiguchi said. So they are more likely to continue deploying capital to external managers rather than becoming investment professionals in their own right.

“Within the limited resources, that is the possibility for Japanese corporate pension funds,” Kiguchi said.

As CIO Kiguchi has spearheaded a strategy where around 90% of the combined $1.2 billion AUM at Okayama Metal & Machinery Pension Fund and West Japan Metal & Machinery Pension Fund are invested in alternatives, an asset type gaining more traction among Japanese corporate pension funds.

During his 10 years as CIO, the cumulative return for the funds has been 95% with an average annual return of more than 7%.