The Government Pension Investment Fund (GPIF) is prioritising preventing systematIc capital market failure over immediate investment returns, courtesy of a chief investment officer (CIO) who has taken a unique approach to his job.
Hiromichi Mizuno, who has been CIO of GPIF since January 2015, revealed to the audience of AsianInvestor’s 7th Japan Institutional Investor Forum his particular priorities.
“Compared to people in this room I’m not an expert of particular asset classes but I have some perspectives about the [GPIF’s] business model,” he said during an on-stage interview with AsianInvestor. “When I look at the business model of GPIF and also this industry as a whole, I realise a lot of things should change for the benefit of our financial beneficiaries.”
Mizuno oversees investment strategy for an organisation of leviathan size. It held ¥162.27 trillion ($1.55 trillion) in assets as of end-December 2017. Yet unlike other asset owners, which are shifting to internally manage more of their assets, Japan's laws disallow GPIF from doing so. So Mizuno is opting to use the fund’s very long-term investment objectives and the sway of its huge asset pool for different purposes.
“I’m trying to create a new CIO model that tries to affect the system, including system sustainability,” he said.
By this Mizuno is referring to a desire to ensure best practice among investors and companies. Under his watch, GPIF has become far more assertive in its requirements of the asset managers it employs. This has included seeking information on how its asset managers address their stewardship responsibilities such as proxy voting as well as asking for information on how companies remunerate their employees.
As Mizuno said, asset management is one of the very few industries in which “companies try to pass through their costs of doing business to the customer”.
The danger, as he sees it, is that too many asset owners allow their many asset managers to not take their investing and due diligence responsibilities seriously.
“We are trying to create a totally new asset owners’ business model, which is to not pay as much attention to the daily volatility,” he told AsianInvestor on the sidelines of the forum. “We are trying to manage money for 25 years so we should pay more attention to how to make the capital markets more sustainable.”
He noted that asset owners face a conundrum in the fact that, unlike asset managers, they don’t face direct competition.
“If an asset manager a few years ago overweighted [US electronic car maker] Tesla and underweighted [traditional auto builders] Ford or GM (General Motors) then of course you beat the competition. But most of GPIF’s money is managed passively, so we don’t benefit from that kind of tilting unless the whole system and industry is sustainable,” he said. “GPIF will not be the beneficiary of zero sum competition within the industry.”
The CIO is serious about his focus on longer-term responsibilities. Mizuno said he doesn’t typically meet with asset managers pitching for specific asset mandates, because his time is consumed by efforts to push through better market governance and transparency.
“At the end of the day everybody knows that the portfolio asset mix dictates 90% [of returns] and the only difference we can make is some tilting of the portfolio and selection of the asset managers to move the needle,” he told AsianInvestor on the sidelines of the forum.
“Some days I don’t even look at any screen for the entire day and at the end, I realise that we just made a huge return or a huge loss,” he added.
For Mizuno, a key way to pursue better systematic stability has been to become an advocate of environmental, social and governance (ESG) principles.
“ESG is one of the convenient ways to communicate that GPIF is paying more attention to system sustainability,” he said. “As we have become more globally diversified we have become less vulnerable to daily volatility but more vulnerable to system failure…when the capital market system fails we are dead. So I have a very strong view that for the business of capital markets to be sustainable, the society to support it must be sustainable."
These are serious issues in Japan, a country that was for years best known for the passivity and even apathy of its asset managers in the face of corporate incompetence or even fraud, such as during the emergence of a massive fraud scandal at camera maker Olympus in 2011. That scandal caused its share price to halve in the months after it emerged, and such fears helped to prompt the government of Shinzo Abe to introduce a stewardship code in 2014.
GPIF became a signatory of United Nations’ Principles for Responsible Investment in September 2015. And under Mizuno the pension fund has signaled its willingness to push ESG principles. In July 2017 it allocated ¥1 trillion of its domestic ESG passive equity investments following three ESG indexes. It’s currently looking at picking ESG indexes for international equities, which it is likely to direct large sums of assets to follow as well.
Plus it is introducing a new fee structure for its equity asset managers from April, a reflection to the fact it saw a slight negative level of alpha from its active asset managers for the 10 years to March 2016. The new fee structure will reward managers in proportion to their performance.
Mizuno was not willing to discuss the intricacies of portfolio allocation, in large part because he doesn’t follow it closely himself. But it’s evident from his conversation that this isn’t where he feels he can offer the most value anyway. Instead, he wants to keep using the gravity of GPIF’s asset base to force the sort of change he believes will keep the financial system as healthy as possible.
For the sake of Japan’s financial markets and better corporate governance, investors should hope Mizuno can make a real difference with his focus.