Debate about unprecedented change in governance and management structure is taking place within Japan’s $1.3 trillion Government Pension Investment Fund after it announced the appointment of its first chief investment officer.
The institution, which manages the world’s largest retirement savings pool, revealed this week that Hiromichi Mizuno would resign as an investment committee member to become its first CIO from January 5. The move was broadcast internally yesterday.
Mizuno, 49, is a partner at London-based private equity firm Coller Capital, which buys assets from other PE investors. He is responsible for finding, arranging and monitoring investments.
He had only been brought into GPIF’s investment committee this July on a two-year term amid mounting pressure on the institution to diversify its assets and increase its investment expertise.
GPIF has set out a new strategic asset allocation plan to almost halve its domestic debt exposures and ramp up its holdings of international stocks and bonds, as well as branch out into alternative investments.
However, GPIF’s current structure is not seen as conducive to this new policy mix. At present it has a management board comprising only of president Takahiro Mitani and executive managing director Kaname Ookubo. Having such power in the hands of so few is not only seen as ineffective, but risky.
“Mitani has the power to decide everything, which is not good from a risk management point of view,” one senior industry source told AsianInvestor.
“GPIF has to move to a model in which a board of directors monitor the process because it is so large that if it makes a mistake the implications would be disastrous.”
Japan’s health, labour and welfare ministry – which administers the fund – and GPIF are now debating whether to move to a model featuring an eight- or nine-strong board of directors to oversee investment decisions, with the goal of improving risk monitoring and investment implementation.
However, any move to a new governance model would require legislative change and the process of amending laws in Japan is known to be cumbersome.
Even if ministry bureaucrats approve the new model – and sources confirm there is plenty of opposition – it is understood legislative change would not likely be proposed until next June and implemented in March 2016.
“GPIF has a complex organisational structure. It is debating how it should structure its decision-making systems once the CIO starts in January. At this moment it has not made any decisions, but change will be announced in the near future,” said an insider.
One scenario understood to be under discussion internally is appointing existing investment advisory committee members to the board of directors. But sources dismiss that, saying greater investment expertise is needed. The committee currently consists of finance and economics professionals appointed by the government.
“GPIF can take the current governance structure and improve the investment process under the current law,” said a source. “However, if it changes to the new governance model, speed of change in the investment process will be that much more rapid.”
GPIF has three main departments: planning, research and investment management. As things stand, when Mizuno starts his CIO role in January he will become the new executive managing director, replacing Ookubo on the two-man management board.
It is expected he will then seek to reinforce GPIF’s investment teams. The fund has 30 portfolio managers boasting a Japanese equivalent of a CFA qualification, with seven in its research team.
With his private equity background it is consensus thinking that Mizuno will bring a much-needed expertise to GPIF as it strives to dip its toe into alternative investments.
“It is very good to get this kind of expert as head of investments,” said a well-placed source. “Improving implementation is critical to improving GPIF’s investment process. Mizuno has a strong private equity background, which will be good for the alternative investment process.”
It is understood GPIF is seeking to take best practice from the likes of the Canadian Pension Plan Investment Board and Singapore’s GIC. “It is looking very closely at how it should deal with risk management in line with changing its strategic asset allocation,” the source noted.
GPIF’s investment advisory committee has conducted a review of the institution’s policy asset mix and optimal asset allocation. It announced a revised medium-term plan effective from the end of this October with a target allocation to move from 60% domestic bonds to 35%, while increasing domestic stocks from 12% to 25%.
At the same time it is seeking to increase holdings of international stocks from 12% to 25% and international bonds from 11% to 15%. It also plans to introduce alternative investments to a maximum 5% of the overall portfolio.