Japan’s Government Pension Investment Fund is entering a busy phase in its development, with new investment mandates being considered and plans in place to create a new governance structure.

Putting in place another level of expertise as the ¥149.2 trillion ($13.5 trillion) fund enters new investment territory may be a wise move, industry observers told AsianInvestor, but it is likely to mean longer deliberations over investments.

The institution, which on Friday announced a robust return for the first quarter of fiscal year 2017, also said last week that it had appointed a new nine-person investment management committee, that will work with president Norihiro Takahashi on major allocation decisions.

The deeply experienced committee will start operating in October and will be headed by Eiji Hirano, vice chairman for Metlife Insurance. Other members include Tomio Arai, an emeritus professor at the University of Tokyo; Naoko Nemoto, an economist at the Asian Development Bank Institute; and Sadayuki Horie, senior researcher at the Nomura Research Institute.

Potential delay

The move was broadly welcomed by industry experts as offering increased transparency and product expertise. However, one Tokyo-based investment consultant at a US asset management firm said its introduction could lead to delays in investment decision-making. “For the board to get the relevant control of the investing process, an appropriate governance structure will have to be built up,” he noted. 

In fact, Thailand’s Government Pension Fund, this year scaled down its investment committees, to facilitate quicker decision-making. Institutions in the region, from state asset owners to insurers, have been seeking to become more nimble in how they manage their portfolios.

Nevertheless, the creation of GPIF's new committee follows a government decision last year to revise the National Pension Act governing the fund, to ensure that important decisions such as those on its asset mix would be made by a committee, rather than by Takahashi alone. The intention is to add expertise and a collegiate system to GPIF’s decision-making.

The investment consultant, who has advised Japanese asset owners, told AsianInvestor: “A new governance scheme for GPIF has been discussed for a long time. Under the current one the president has all the discretion for investment, which has been criticised as an excessive concentration of power." 

GPIF already has an investment advisory committee, which Takahashi and chief investment officer Hiromichi Mizuno must consult when making investment decisions. While the new committee will include some existing members of the investment committee, including Arai, it will be more of a management board. 

The creation of the new committee is part of an effort by the world's biggest pension fund to improve its governance and processes to add transparency and accountability, effectively acting as a role model for other investors.

Allocation shift

GPIF has also gradually been shifting its assets under management from a heavy focus on low-yielding domestic markets and towards a more international allocation. This has led it to consider increasing its investments in areas such as alternatives; environmental, social and governance (ESG)-themed asset strategies; and infrastructure.

GPIF had already rebalanced its broad asset allocation in 2015 by doubling its equity exposure to 25% and is taking careful steps towards splitting out its portfolio into real assets and alternatives.

One asset consultant told AsianInvestor the fund is “just trying to come out of a slumber and break the portfolio into pieces", such as infrastructure and real estate. “But they haven’t actually outsourced yet, because they want to get the risk profile right for each of those pieces,” he said.

Similarly, GPIF has said it wants to allocate to ETFs that use smart beta, or indexes that use factors other than market capitalisation. Again, it hasn’t yet implemented that strategy, according to local market players.

A GPIF spokesman declined to comment on the new investment board, referring questions to the Ministry of Health, Labour and Welfare. The ministry did not respond to emailed requests for comment. 

The GPIF announced its fiscal first quarter (April to June) result on Friday, adding 3.07％ value to the portfolio on an annualised basis. This follows a full-year fiscal 2016 return of 5.86%, a strong bounce-back following three down quarters in the past six. The cumulative annual return for the fund since 2001 stands at 2.89%.