In a pivotal moment for Japan’s financial landscape, plans by the Government Pension Investment Fund (GPIF) to widen its scope of asset managers have reverberated through domestic markets. With GPIF president Masataka Miyazono’s announcement at the forefront, the world’s largest pension fund embarks on a strategic journey, challenging traditional selection criteria and signaling a shift in investment strategy as Prime Minister Fumio Kishida aims to elevate the standard of the country’s asset owners.
Comments by Miyazono, the president of the world’s largest pension fund, at his media conference on January 19, 2024, captured the attention of market experts and media. He announced plans to open the public pension fund to more asset managers while eliminating certain criteria used in selecting asset managers, such as the minimum scale of assets under management and the number of years of experience in servicing financial products.
GPIF previously required an asset manager company to hold more than 100 billion yen in assets under management. The public fund also mandated that an asset company’s investment product must have at least 30 billion yen in assets with a track record of five years. However, the GPIF has scrapped these numerical criteria, stating it will accept applications from investment management institutions with “a sufficient track record”.
This change has led to assumptions that GPIF will open its door to more asset managers and has raised speculation that it could support the government’s plan to introduce the emerging managers program this summer. The government is aiming to set up a framework to allow newer asset management companies to enter the market.
However, the fundamental understanding stays in place among many fund managers responsible for public pension funds that any public pension fund, including GPIF, will require an asset management company to hold at least 100 billion yen in assets and would require a track record of at least three years.
Enhanced qualitative evaluation
The public fund aims to enhance its quantitative evaluation process, which will streamline the selection procedure for asset managers. Kishida envisions transforming Japan into a wealth management powerhouse, with his government urging pension funds to allocate funds to up-and-coming asset managers. Miyazono emphasized that GPIF’s shift should not be interpreted as aligning with the government’s policy goals, although experts in the industry do not perceive it that way.
“Both GPIF and other asset owners, including corporate pension funds, share a common fiduciary responsibility,” explained Katsuyuki Tokushima, head of pension research and ESG development at NLI Research Institute. “The key question revolves around whether GPIF can confidently entrust a large pool of its funds to an asset manager with a limited track record. We are closely monitoring how GPIF navigates this challenge while enhancing its fiduciary duty.”
Tokushima further elaborated that GPIF’s intention to broaden its manager base holds significance not only for the fund itself but also bears great importance for other asset owners, given its implications for Japan’s future and the government’s objectives.
GPIF’s investment strategy tends to influence other asset owners, corporate pension funds and other institutional investors in Japan amid the public pension fund’s substantial asset size and its role in managing the country’s national pension system. For instance, its asset mix policy, which is reviewed every five years, is closely monitored by Japanese and global market participants, including asset owners.
In recent years, the GPIF has undergone reforms aimed at enhancing transparency, governance, and sustainability in its investment practices. These reforms include incorporating environmental, social, and governance factors into investment decisions and promoting responsible investing practices.
CONSIDERABLE INFLUENCE
GPIF stands as the world’s largest pension fund, managing around 220 trillion yen or $2 trillion in assets. As a key player in global financial markets, the fund’s investment decisions can have significant implications not only for Japan’s economy but also for international investors and markets. Its asset scale gives it considerable influence, often inviting thorough examination from a wide range of financial experts and policymakers in Japan and worldwide.
The GPIF, which started managing funds in 2001, operates under the jurisdiction of Japan’s Ministry of Health, Labour, and Welfare. GPIF makes investment decisions based on the policy asset mix of 25 per cent each in domestic and foreign equities, and domestic and foreign fixed income. The current policy asset mix, which started in April 2020, shall meet the investment objective of a real investment return (net investment yields on the pension reserve fund less the nominal wage growth rate) of 1.7 per cent with minimal risks. GPIF reviews it every five years and this year marks the year when it decides its new policy objective this year to be implemented from April 2025.
The GPIF’s massive size and significance stem from its role in managing pension reserves for various public employees and workers covered by Japan’s national pension system, making it a crucial financial institution in the country’s retirement landscape.
In recent years, the GPIF has undergone reforms aimed at enhancing transparency, governance, and sustainability in its investment practices. These reforms include incorporating environmental, social, and governance factors into investment decisions and promoting responsible investing practices.
Around 90 per cent of Japan’s public pension system is funded through premiums and government funding. GPIF, which covers the remaining 10 per cent, is only meant to serve as a supplementary source of funding. Still, greater returns by the fund help strengthen the system. In 2014, GPIF increased its allocation target for equities to 50 per cent from 24 per cent, concerned its previous strategy centered on Japanese bonds would not lead to the returns it needed. It also increased its target allocation of foreign currency-denominated assets to about 50 per cent from about 40 per cent in 2020, further positioning itself to benefit from current market conditions.
PAST AND LATEST DELIBERATIONS
GPIF took the most significant asset allocation shift reform during Prime Minister Shinzo Abe’s administration, in 2013 and 2014. Under “Abenomics”, the GPIF successfully revamped its asset allocation strategy by significantly increasing investments in equities, while slashing its allocations to Japanese bonds which stood at almost 70 per cent before 2013. The fund also adopted a stewardship code, reinforcing its commitment as a long-term investor. Notably, these series of reforms enabled the GPIF to attract top-tier investment professionals from prestigious financial institutions globally, including the current chief investment officer Eiji Ueda, formally a director at Goldman Sachs in Japan, as well as President Miyazono, formally at Norinchukin Bank.
The latest ambitious strategy by the Kishida administration seeks to elevate the asset owners, including GPIF’s standards. He emphasizes the importance of asset managers and owners to enhance their skills and governance structures. As part of this initiative, Kishida plans to establish principles by this summer, defining the roles of pension funds and insurers in ensuring appropriate returns for beneficiaries. Transparency, especially from corporate pension funds, will be a key requirement in this endeavor.
Kishida said in a speech at the Economic Club of New York last September that he aims to boost competition in Japan’s $5 trillion asset management industry, urging new market entrants to convert dormant household savings into investments. He emphasized the government’s commitment to shifting 2,000 trillion yen of household financial assets into investments, with half currently held in cash or bank deposits. Kishida also said to promote sophisticated asset management and attract new players to the sector, noting a 50 per cent increase in funds over the last three years to reach 800 trillion yen within Japan’s asset management sector. But he said there is more to be done as healthy competition in the asset management industry is meant to generating higher investment returns for household, which translate into higher spending and corporate profits.
A former GPIF executive suggested that GPIF’s latest initiative to expand its pool of asset managers could potentially enhance its beta generation by diversifying its investments into alternative assets. “With assets exceeding 220 trillion yen, GPIF essentially becomes a universal owner in the global market, making it challenging to generate alpha,” explained the former executive. “Therefore, the focus shifts towards improving beta. This was one of the strategies we implemented back in 2014 by allocating funds to the JPX 400 Index.”
Moving forward, GPIF is seen shifting toward a more active asset management strategy after Miyazono told at Bloomberg’s Buyside Forum in October that GPIF is in the process of selecting active Japanese stock funds using quantitative and scientific methods. The state pension fund has been selecting active funds for North American and developed country stocks excluding Japan since the fall of 2022. Only 6.9 per cent of domestic equities that GPIF owns are managed by active funds.
Furthermore, GPIF’s plan to expand the managers could stimulate investment in alternative assets, which the portfolio in that field only accounts 1.4 per cent of the entire assets or 2.83 trillion yen since it first started investment 10 years ago and sharply below the investment target of 5 per cent, the former GPIF executive said.
“GPIF’s investment in alternative assets is progressing slowly, but its plan to expand managers could stimulate investment in this asset class,” he said, adding that its current investment in real estate, private equity, and infrastructure are managed through gatekeepers.
STRONG PERFORMANCE
GPIF boasts that it has generated a cumulative return of 132.4 trillion yen or a rate of return of 3.99 per cent on an annualized basis since the pension fund started investing in 2001.
The latest results show that the pension fund booked a record calendar year gain of 34.31 trillion yen in 2023, buoyed in large part by a rise in Japanese stock prices, according to Nikkei.
The fund saw investment returns of 5.73 trillion yen in October-December, amounting to a 2.62 per cent gain, as indicated in GPIF’s quarterly results announced on February 2.
GPIF’s total assets under management grew by roughly 20 per cent in 2023 to 224 trillion yen as stock prices rose at home and abroad. A weaker yen also boosted the value of foreign assets in yen terms.
Global financiers and asset owners are closely monitoring every move that GPIF makes, including their investment results and strategies. The state fund’s plans to broaden their manager selection would have a significant impact on the domestic industry.
“Public and corporate pension funds and other asset owners are closely watching GPIF, but they don’t have to do the same,” said NLI’s Tokushima. “But it will certainly make it easier for them to hire managers if GPIF actually opens the door to expand its manager selection.”
