Japan’s National Pension Fund Association (NPFA), with $30 billion in assets, has issued an RFP for a mandate to run a passively managed fund based on MSCI’s Japan minimum-volatility index.
This is MSCI's first public domestic equity minimum-volatility index mandate run for a Japanese fund on domestic equities, says Ted Niggli, Asia-Pacific head of MSCI’s index business.
Around 28% of NPFA’s equity portfolio is in foreign equities and a quarter in Japanese equities, he tells AsianInvestor.
MSCI does not set a target level for volatility of the index, but the benchmark generally reduces realised volatility by 20-25%, says Shanghai-based Niggli (see graph). It is branded for local investors as the MSCI Nihonkabu Index, which translates as "MSCI Japanese Stock Index".
The size of the mandate was not disclosed, nor were the names of firms pitching for it. Major players in the passive equity management space include Japanese trust banks and US firms BlackRock, Northern Trust, State Street Global Advisors and UBS Global Asset Management.
The index is customised to exclude real estate investment trusts, because Japanese rules separate Reits from stocks, which means Japanese public pensions cannot invest in Reits in an equity product.
NPFA’s move continues a rising global trend among institutional investors to allocate more to passive investments using alternatively weighted indices, in this case risk premia benchmarks.
A few Japanese corporate pension plans have awarded mandates for minimum-volatility passive equity portfolios based on MSCI’s Kokusai (World ex-Japan) index, says Niggli, but he declined to provide names.
In May, Taiwan’s $43 billion Labor Pension Fund chose MSCI as the benchmark provider for passively managed global minimum-volatility equity portfolios totalling $1.5 billion.
Moreover, Northern Trust and Mitsubishi/UFJ Trust Bank have been running passive funds based on the MSCI Kokusai Minimum Volatility Index since September. And Niggli says other managers are close to launching the same using MSCI Kokusai Risk Weighted Index.
“There is a strong demand among Japanese investors for passive, alternative beta products for both Japanese and foreign equity,” he notes. “The strongest demand so far is for minimum volatility strategies for their effectiveness on risk reduction while still fully invested in equity.
"But long term, we believe it is important to diversify across risk premia,” he adds.
Flows from Japanese institutions into mandates referencing MSCI risk premia benchmarks have been very small so far, notes Niggli, but are starting to grow.
The amount of assets run in passive equity mandates is rising, he points out. An estimated 50-60% of the equity allocations of big defined benefit pension plans and sovereign funds is run passively now, from less than 40% five to 10 years ago. “There’s been a big swing on the institutional side [towards passive investing],” notes Niggli.
MSCI launched its minimum-volatility series in 2008 for a range of indices and has since been discussing their uses with pension funds, he adds.
Institutions elsewhere have also been making moves to use alternatively weighted index strategies. Last year Korea Investment Corporation invested $900 million into three FTSE index products based on the strategies of active managers, as reported by AsianInvestor.
Launched in 2008, MSCI’s Risk Premia Index Series also contains the Value Weighted Index, Risk Weighted Index and Equal Weighted Index. These are applied to the standard underlying indices such as MSCI Japan and MSCI World.
Meanwhile, MSCI on Monday launched the MSCI China A 50 Index, a tradable proxy for the broader MSCI China A Index, its parent. The benchmark is composed of the largest 50 constituents of the parent, ranked by domestic free float-adjusted market cap.