Asia's biggest institutional investor, the Ñ26 trillion ($208 billion) Government Pension Insurance Fund, which administrates assets for Japan's social security system, is engaged in a radical overhaul of its fund management structure, says Noboru Terada, executive investment officer.

"The fund's biggest issue is the review of its management structure, which is our first attempt as the 'new Nempuku'," he says, referring to the nickname of the original body managing social security assets.

In April 2001, the Pension Welfare Service Public Corporation (Nempuku) was reorganized in the face of mounting losses. By 2000, according to Cerulli Associates, Nempuku had a Ñ1.4 trillion deficit, because technically its assets were borrowed from an arm of the Ministry of Finance at rates above 5% while interest rates earned on its fixed-income investments plummeted. In the mid-1990s it began outsourcing to investment advisory companies, ending reliance on domestic insurance companies and trust banks, and began investing offshore, with Frank Russell acting as its investment consultant.

Terada joined when Nempuku was reorganized as the GPIF, inheriting a management structure with dozens of fund houses that had been hired on an ad-hoc basis. He is now changing this to a core passive structure with active 'satellite' managers based on styles, but he is finding this more difficult than expected.

His complaint: traditional methods of determining a fund's style (i.e. value, growth) are not effective. "Using Sharpe analysis [measuring excess return per unit of risk], of our 36 equities managers, only one had 70% or more of the stocks in their portfolio meeting their style," he said. In other words, a manager may claim a value strategy, but half of its portfolio will turn out to be growth stocks, for example.

Terada blames this on managers switching strategies as they react to market events. Over the past two years, a lot of growth managers have shifted into value investing. This creates problems for pension funds looking at past performance because it creates biases within style groups. This laxity has been allowed in Japan because until now, no pension fund really bothered to analyse style behaviour.

This means GPIF - which is no longer using a consultant - must rely on intensive interviews and qualitative analysis to figure out what managers are actually adhering to their purported strategy.

Terada says he will slash the number of equity managers in half, with final decisions expected in April, after the end of the fiscal year. The GPIF is increasingly keen to use fund managers with global outlooks, not country ones. International bond managers are not under review as they all have mandates less than two years old.