There is often a disconnect between pension fund plan sponsors and the investment managers they rely on. Sometimes this is because the plan sponsor does not understand what its managers are doing; sometimes it is the fund managers failing to explain themselves. Throughout Asia and Japan, underfunding problems and the need for global diversification are forcing pension funds to educate themselves.
There are a handful of plan sponsors that are among the world's most sophisticated. One of them, Osaka Gas, talked at length at a recent conference in Tokyo about its relations with its managers. Fund managers say Osaka Gas is a model in the Japanese pensions community (indeed, globally) and that an increasing number of the region's retirement scheme trustees are migrating toward its way of doing business.
Hidekazu Ishida, investment officer at Osaka Gas, indicated that communication was crucial to his understanding what managers are doing. Ideally this would involve monthly reports and quarterly meetings, although he recognizes that because his company is in Osaka, face-to-face encounters are irregular. But in addition to at least two such updates, he engages in an annual "soul-searching" meeting, to question the mandate at a strategic level.
"With new managers, during the first six months I want vivid explanations of why they bought various securities," he says. "Reports tend to have too much emphasis on numbers, on tracking error. I want a more qualitative assessment. I want portfolio managers to visit us once or twice a year to explain themselves. If we have smooth communication, I can try to get to know the person.
"I want managers without too many clients," he continues. "I want to know them, and to know how portfolio managers are treated within their company. I want to know if he's planning to leave, especially if he is one of our small cap managers. Small cap managers fluctuate a lot, especially when they're within a big organization where they're small fry. If a manager isn't happy and leaves, it causes an interruption in investment. We can't talk about this in a formal setting; I want an off-the-record chat about his bonus, how he likes his boss, and so on. I don't want any marketing people around."
He adds that picking managers now has more to do with talent than with keiretsu relationships in Japan: "If a star manager leaves or if there is upheaval within a fund manager's organization, we have to review that fund manager. There are now fund managers at the big banks moving freely, taking their expertise with them. It is time for us to pick the best managers. We want marketing peoples' quarterly reports to help us understand how fund managers made their decisions and outline their career path, so we can follow those managers we like.
"New investments or products should be explained," he adds. "I want to know what the manager is thinking. If they achieve good performance they often want additional allocations, but then we should be taking profits. So they have to argue their case. We prefer products with future upside, and that often involves contrarian thinking...We look at the investment philosophy to see if they are doing what they claim."
If that sounds intensive, it is, but fund managers at this conference said they did not necessarily object if the client knows what it is doing. What they resent is the kind of hand-holding typical in Japan, where plan sponsors demand all sorts of data, all the time, that has nothing to do with understanding the investments, but is more a form of political cover, so these administrators feel like they will not be blamed for any mistakes.
Ishida recognizes that if he is going to make demands on fund managers, it requires an equal effort on his behalf. He notes that at Osaka Gas, the pension fund secretariat reports to the company's board of directors. The secretariat cannot simply regurgitate numbers from fund managers' marketing brochures, lest the board make hasty and erroneous decisions. "It is up to us to understand how fund management companies work, and why they do what they do," Ishida says.
Osaka Gas manages a tax-qualified pension plan with Y154 billion in assets (but Y270 billion in liabilities - a ratio typical for even well-run Japanese companies). It has 9,000 members and 3,000 beneficiaries. Half of the assets will shift to a new defined contribution plan, says Ishida.
The company has an annual return target of 4%, and relies on private equity and hedge funds as well as traditional asset classes to reach it. The company has a mix of core passive and active satellite managers. Ishida complains the firm still has several managers it wants to fire (in Japan, relationships can still prevent funds from being managed efficiently). He will eventually get his way.