Growth in prosperity and wealth across Asia isn’t a foregone conclusion and will only be a result of deliberate decisions and choices by policymakers and companies, the 2024 Top1000funds.com Fiduciary Investors Symposium has heard.

Future Fund director of research and insights Craig Thorburn told the symposium in Singapore that Asia’s destiny won’t happen by chance.

“One of my favourite quotes is: ‘Destiny is not a matter of chance; it’s a matter of choice[1]’,” Thorburn said.

“Asia’s destiny is not just going to be driven by its demographic pyramid. It’s also defined by the policy choices that the various leaders of these very different countries are going to be making. That is crucially important.”

Thorburn said the success of Singapore has come about through choice.

“When you look at potentially the success of India, and I would argue the last 10 years is a very good example of that, it has been done through successful incremental choice,” he said.

“When you look at what’s happened with China in recent years…part of that has been a matter of choice when it comes to the policy choices that the regime has put in place when it comes to its entrepreneurial society.”

Thorburn said investors should always bear this in mind when considering underlying fundamental issues such as demographics.

“You should have a bias towards deploying more to [Asia], but  my one advice is always remember that…quote about destiny: it’s a matter of choice, not a matter of chance,” Thorburn said.

Thorburn said the $A212 billion Australian sovereign wealth fund currently has about 30 per cent of its total portfolio invested in Asia, which includes Australian exposure because “I do consider Australia as Asia” but does not include Russia because “we don’t own Russia”.

“I do believe that all of us should have a bias in our thinking around how do we look towards increasing our Asian exposure.

Constrained by the universe

Hong Kong Monetary Authority chief investment officer of asset allocation Joe Cheung agreed that “the future is Asia” but noted that as things currently stand, institutional investors are constrained by the investable universe.

“Currently, Asia still has much smaller market cap in the listed market side,” Cheung said. “And if we want to invest more in in Asia, now we have to make quite an active decision to overweight Asia.

“I’m sure, over time, the market cap of Asia will grow mainly through all the new listings, for example, in the public market; and also through more investments available in the private market,

“But currently, it is still quite a small proportion in our portfolio. And it’s very hard to make a conscious decision to overweight, to allocate more to Asia, because that’s an active decision that we are accountable for.”

Cheung said investors are entering a new regime where a recent focus on risk will be replaced by a closer focus on returns.

He said that between 2009 and 2020 the cash rate in the US was close to zero and no more than 1 per cent in 10 of those 12 years. He said this dragged down the whole yield curve.

“If you look at bond yields, in those 12 years the average, say, 10-year yield was something like 2.3 per cent, while inflation was close to 2 per cent,” he said.

“For most institutional investors [with], say, a typical 60/40 total portfolio, a lot of money is tied up in safe assets – government bonds, and so on. If you look at a large part of your portfolio not being to earn a real rate of return, of course you worry, and you would make some changes to deal with that.

“We take on more risk, right? So that’s the easiest way we can handle that low interest rate regime.”

Taking on more risk

Cheung said that in fact that’s what institutional investors did, with some analysis suggesting fixed income exposures were cut on average by as much as 15 per cent, equity exposures increased by 5 per cent, and exposures to alternatives including private equity increased by as much as 10 per cent.

Cheung said investors also employed strategies such as risk parity, which involved leveraging bond exposures and some equity exposures to increase returns.

In a regime where institutional investors have been increasing risk, and using some sort of leverage in order to earn a return, the focus naturally has been on returns.

“In the coming regime, most of us would agree that the level interest rate is not going to go back to near zero for a while,” Cheung said. “So for us, at least, we are earning a real return on our safe assets. And in that sense, the focus going forward will be back on risk rather than on return.”

Cheung said this would cause investors to rethink leverage-based strategies “because the cost of funding is no longer low”.

“And also [they] will revisit whether it makes sense for them to have more equity,” he said.

“That’s the biggest thing we are thinking about in terms of the changing regime, because of the changes in the level of interest rates.”

Thorburn said that in the past 18 months the A$212 billion ($144.3) Australian sovereign wealth fund has reallocated about A$70 billion of assets, with about $A7 of that reallocation away from hedge funds and towards mostly investment-grade credit.

“The reason for that is quite simple: we’re being paid for it,” he said. “For a long time, we haven’t been paid for that, and we haven’t seen conditions as attractive as this probably since the GFC. For us, it was a bit of a no-brainer to deploy into it.”

Thorburn said the decision to allocate away from hedge funds was driven by a desire to simplify the portfolio.

“We actually really like hedge funds – always have, always will,” he said.

“But they do add complexity to your portfolio, and in a world where you’re not quite sure – is it supposed to zig or is it going to zag? – you probably want to reduce that level of complexity in your portfolio. And that’s what we did.”

Thorburn said the fund didn’t have the luxury of reducing its bond allocation because it is already very low.

“Our bond exposure is done through derivatives,” he said. “We do have bond exposure, but it’s quite small in the general scheme of things. We also didn’t want to reduce our equity exposure, because we have a very aggressive risk target that we have to hit: Australian CPI plus 400 to 450 basis points is an aggressive target.

“If we’re going to reduce [equity exposure] even more, and it’s less than what some of you in this room would have, we need to be very careful if we’re going to make that decision.”

[1] “Destiny is not a matter of chance; it is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”
– William Jennings Bryan (1860 – 1925)
https://www.pbs.org/wgbh/americanexperience/features/wilson-william-jennings-bryan/

 

Working out which companies have a viable transition path to net zero is a complex task for investors. When it comes to figuring out how a company will get there and how their transition will be financed, more investors are making a distinction between emissions that are hard to abate, and emissions that are expensive to abate. 

 As a growing number of investors make net-zero pledges, they are not only faced with the job of setting a strategy to achieve that goal, but they’re also faced with answering some fundamental questions about the companies and businesses they invest in, and what it really means to implement a net-zero strategy in practice. 

The 2024 Fiduciary Investors Symposium in Singapore last week heard that it’s not a simple task to assess a company’s potential transition to net zero, the technology that might be required to support it, and the role of asset managers in financing the transition. 

Norges Bank Investment Management global head of active ownership Wilhelm Mohn (pictured) said investors can’t just focus on companies in a portfolio that are leaders or laggards on transitioning to net zero, “it’s everything in between”. 

“A lot of these sectors, as you can guess, are those hard-to-abate sectors, and we expect the transition to be a transition over the next 20 years,” he said. 

However, he said that the $1.5 trillion asset owner is now thinking “less about ‘hard to abate’ and more about ‘expensive to abate’” emissions. 

“In terms of most of these sectors, the technology and the solutions are there,” Mohn said. “It’s more how you essentially finance it, and how we also as investors can be supportive for long-term decision making.” 

Bridgewater co-chief investment officer, sustainability, Carsten Stendevad, said the “hard or expensive” perspective is “a very, very insightful way of putting it”. 

Stendevad said Bridgewater research suggests that around 40 per cent of current emissions can be abated using existing technology. 

“We have the technologies, we have even sometimes mature technologies, we just have to implement them at scale,” he said. “It will, of course, require capital, but it will require, I would say, ‘normal’ risk capital. 

“Then you have the remaining 60 per cent of emission reductions, where the technology is not quite there yet, either because, literally, we don’t have the technology, or because it just hasn’t been proven at scale, or…it’s too expensive. And so, this needs a different type of capital.” 

Stendevad said green capital and venture capital is attracted to this type of opportunity, but “the amounts that are needed are so big, and the risks are still quite significant that that’s really the part of the system that is the hardest to make work”. 

Stendevad said that making informed decisions on whether a company is doing what it said it would do to transition to net zero, or whether it can even do it, is “such an important question”. 

“The starting point must be a fundamental understanding of how a company is related to real-world emissions, whether that be its operations, its energy consumption, its supply chain, its products – in other words, really a comprehensive understanding of scope, one, two, and three [emissions],” Stendevad said. 

He said companies fall into three buckets: low-emitters; climate problem solvers; and high-emitters. 

He said low emitters do still need to reduce emissions but can do that mostly by switching to renewable energy sources. He said about half of global equity market capitalisation is made up of low-emitting companies. 

“So you can kind of think of them as not really part of the problem, not really part of the solution,” Stendevad said. 

Climate solution companies are those whose products and services – either accidentally or by design – mitigate climate change. 

“That could be, of course, green energy producers; it could be EVs; it could be green tech; and that represents something like 5 per cent of market cap,” Stendevad said. 

The remaining companies – close to half the capitalisation of global equity markets – are high emitters, and “this is where the problem is,” he said. “The big question here is, are these high-emitting companies transitioning, or are they not? That’s very much the epicentre of the challenge. 

“The whole challenge of net zero is to figure out which of these companies have a credible way of…transitioning their business model.” 

Stendevad said Bridgewater’s analysis suggests high-emitting companies that have a credible path to net zero account for about 20 per cent of global market capitalisation – in other words, about half the current population of high-emitting companies has a credible path to net zero, and the other half does not. 

Stendevad said investors need to answer fundamental questions before making any decisions to back a company’s net-zero transition plan: is it technically feasible, is it financially feasible, does the company even want to change, and what are its achievements to date? 

As much as 40 per cent of global emissions are created by the real estate sector, and Cbus chief executive Kristian Fok said members of his fund – which has its origins in the Australian construction and building industries – work in a sector “that has a huge contribution to carbon, but also has a huge potential to contribute to the reduction in carbon”. 

Fok said that as a member of the Materials and Embodied Carbon Leaders Alliance (MECLA), Cbus is looking at “the components that will go into reducing the carbon footprint in terms of the buildings that you construct”. 

“It’s how do we stimulate green steel? How do we stimulate zero emission concrete? How do we think about design, timbers, and things like that. 

“In a sense the easy bit’s done, which is the trying to make it net zero from an operations point of view. We now need to tackle the harder bits. But the value becomes in the tenants and now moving to saying, OK, it’s not just the operating footprint, it’s actually the footprint of the development that we’re going in. So there’s sort of a race to the top.” 

Fok said the fund is aiming to put its money where its mouth is and one of its current commercial property developments is aiming for a level of embodied carbon 30 per cent below the current benchmark.  

“From a cost point of view it’s quite interesting, because it is more costly to construct,” Fok said. On the other hand, because it’s an attractive building to work in because of its environmental credentials, lease incentives paid to tenants are lower. 

“The other thing is that we’re able to issue green bonds,” Fok said. “We just recently issued a billion dollars of green bonds against the portfolio, and they’re a lower cost of finance. So, we’re seeing the whole ecosystem continue to evolve to try and encourage that innovation.” 

Assessing the potential path to net zero and its impact on a company is complex enough even where a manager has made an active decision to invest. But for an asset owner like NBIM, which by virtue of its sheer scale owns about 1.5 per cent of the world’s total equities, the task is immeasurably more complicated. 

Mohn said even though the bank is “a largely passive investor, and largely invested everywhere forever” it has an active program of engaging with companies it invests in. 

“It’s probably the most important thing we can do, it’s most important from a standards development point of view,” he said. 

“That’s how you get, you can call it, sustainability beta, if you will. We target a 3 per cent real return for the portfolio, and that’s how you get it on the long-term. We believe we have an inherent interest in sustainable development.” 

Mohn says “it’s really important to start with that piece of the puzzle, and then it comes to the companies and that’s very different, it’s very different game”. 

“We have to prioritize,” he said. “We think about the exposure, the companies, and then think about the actual management of it, and then the performance. Based on that, you can [rank companies].” 

Mohn said that for net-zero targets in particular, NBIM has developed a Climate Action Plan that sets “an ambition for our companies to have operations aligned with net zero by 2050”. 

“That means having targets by 2040,” he said. “For high emitters we expect them to set targets already. And we’ve prioritized our top 70 per cent of financed emissions, some 250 companies, those direct emissions, scope one and scope, two; and then the most important indirect emitters, that’s essentially bank and automotives, for more in depth dialogues where we are really seeking to not just ask the questions around governance and policies, but also understand the details of their long-term transition strategies.” 

Mohn says NBIM has produced a document setting out its expectations on climate change, covering a range of sustainability topics and available publicly.  

“But what we did with the expectations on climate this year is that we changed it quite significantly towards something that is very useful for a consistent and long-term dialogue with the company as it transitions,” Mohn said. 

He said NBIM has some foundational expectations around board accountability and governance, setting targets and working in a science-based manner to assess timeliness of interim targets. 

“And then we break it down [into steps]: where you start, and how as you go through essentially transitioning, and that’s worked out really, really well in company dialogues, and really allows us to pick and mix and match the level of maturity of the company,” he said. 

 

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Director of FSSA Investment Managers Vinay Agarwal has warned investors against drawing comparisons between China and India just because the two have similar market sizes and populations. And despite India’s sky-high valuations, Agarwal argued that the country’s solid market structure and culture will make it worth investors’ while.  

FSSA is a part of Mitsubishi UFJ-owned First Sentier Investors and Agarwal’s merit includes Indian Subcontinent strategy and Asia-Pacific equities investments in general.  

He told the Top1000funds.com Fiduciary Investors Symposium in Singapore that from an equity perspective, many people considered India now to be where China was 20 years ago, but one of the most important differences is their level of resilience.  

“China has been on such a massive, positive run for decades now that the companies there have not gone through a prolonged tough period, whereas in India, it’s always two steps forward one step back,” he told the crowd.  

Indian companies had to negotiate with conditions such as complex requirements from close to 30 state governments and lack of infrastructure. But most importantly, there is limited access to capital, whereas Chinese companies get to enjoy readily available state-directed capital.  

“Capital consciousness is far higher,” he said. 

“Our engagement with these [Indian] companies is always about composition, remuneration, succession, quality of financials – all those things that help us establish whether something is quality or not…which is in most cases is lacking in China.” 

Worth the price? 

The MSCI India Index traded at 22 times price to earnings this week, which is ‘nosebleed valuations’, according to Anuj Girotra from the $500 billion Canadian pension investor CPP Investments. 

About $5 billion of the fund’s $20 billion Asian active equities strategy is allocated to India, which Girotra oversees. The market-neutral, pure-alpha portfolio focuses on public equities, PIPE deals and pre-IPO opportunities in the consumer, healthcare, financials and technology domains, which Girotra said is a level of flexibility needed to invest in India.  

L-R: Anuj Girotra, Colin Tate, Ben Weiss, and Vinay Agarwal

“India is still a relatively shallow market, you can’t build a very deep business if you’re only doing publics or only doing privates,” he said. 

Girotra encouraged investors who think the Indian markets are too expensive to look at valuations from another perspective.  

Despite having more than 5000 listed companies in the country, he said after applying some reasonable market cap, liquidity and return on equity thresholds, in the past 10 to 15 years most growth equity investors around the world have probably been chasing only 20 companies.  

“And a ton of capital foreign capital has been coming into India, which explains why most of us anecdotally believe India is very expensive,” he said.  

Agarwal said India’s valuations, despite being substantial, are worth it. He added that its companies’ earnings are also less lofty compared to those in China, for example. 

“When you look at the earnings of Chinese companies, easily 20 to 25 per cent of the profits are subsidies, which are given by provincial governments or central governments,” he said.  

“When you take that out, the earnings will be a lot lower, and the premium will be a lot higher when you’re comparing China to India.” 

Growth ahead 

Looking ahead, the next event bound to have an enormous market impact is the imminent Indian general election, according to geopolitical consultant and Veracity Worldwide managing director Ben Weiss. 

The ruling BJP party’s confidence in maintaining its position means that the policy and regulatory environment will likely stay on the same trajectory as the past decade, which is not a bad thing, Weiss said. 

“The stock market in India during that period of time basically tracked the US stock market. At the moment, they are showing 8 per cent GDP growth,” he said.  

“One thing that has marked the BJP’s time in power under Prime Minister Modi has been significant easing of business, both on the financial investment side and certainly on the corporate side. You see a lot of red tape go away.” 

There are also many government efforts done to bolster the economy and infrastructure, he said, including a ₹7 trillion ($84 billion) rail project in the latest budget. 

India’s tension with China is “not unspoken of” as a rationale for investment into the country, he said, and it has created many initiatives in Western countries such as the U.S.-India Critical and Emerging Technologies Initiative (iCET). 

However, Weiss warned investors might want to be wary of India’s “democratic backsliding” over the last 10 years.  

“The BJP has taken a very heavy hand when it comes to things like controlling media and the flow of funds to NGOs that happened to be critical of his government. 

“There’s some questions around the independence of some of the courts, so still a number of real issues.” 

Pictet’s Geneva-based chief economist Patrick Zweifel remains bullish on the outlook for China, suggesting that stabilization of macro factors and “promising cyclical development” will breathe life into the market of world’s second-largest economy.  

The comment came amid a particularly weak stretch for the Chinese equity market. The MSCI China Index return was down close to 14 per cent in the past year as at the end of February 2024, compared to a 9.2 per cent gain for the MSCI Emerging Markets for the same period.  

But at this week’s Top1000funds.com Fiduciary Investors Symposium in Singapore, Zweifel said he remains confident in China amid fluctuations because the country never really lost sight of its end goal.  

“China has always wanted to be part of the global economy, and wanted to internationalize its currency, which was pretty much its ultimate goal,” Zweifel told the symposium.  

“I always analyze China in relation to that goal, which hasn’t really changed.” 

Zweifel said a prerequisite for achieving that goal is for China to stabilize its currency and inflation, which in turn created a favorable environment for bonds. He pointed out that Chinese bonds have by far outperformed their US counterparts.  

“The problem was [the] equity market – they just didn’t care about it,” Zweifel said. 

“But I’ve always again thought that it would start to matter as soon as the equity market themselves starts to challenge this ultimate goal of internationalizing the Renminbi. 

“And I think we’re just right there. Everyone has lost confidence in the equity market, and they are currently doing everything to reform and boost investor behavior – not only domestically but internationally – to rebuy in that equity market.” 

Stabilization ahead 

According to a Pictet analysis, the main macro factors behind Chinese equity fluctuations (construction activity, home prices, world real export, trade-weighted USD and commodity prices) are largely still real estate indicators.  

“Even if we don’t know exactly the future of the real estate market in China, most of the correction is actually behind us, and we would expect some sort of stabilization going ahead,” he said.  

“It’s unlikely to have further decline on the Chinese equity market linked by that factor.” 

Meanwhile, “promising cyclical development” such as inflation growth is moving into positive territory and will in turn propel nominal GDP growth, Zweifel said. This, combined with an ongoing government reform that aims to make state-owned enterprises more friendly to stakeholders and distribute more profit, will likely lead to earnings growth.  

There is ongoing debate in the industry about whether emerging markets can technically be classified as an asset class. Zweifel was of the view that it is, but a highly heterogeneous one.   

He recommended three ways of considering emerging market countries for investment, the first one being commodity exporters versus manufacturers; the second one being debtors versus creditors; and the third being China versus the rest of emerging markets, due to the sheer size of its economy and heavy dependence on domestic factors.  

“It makes very much sense to be active [in China],” Zweifel said. 

“It makes especially more sense to be active in economies that are very rapidly changing structurally. 

“I mentioned that past performance of China was highly linked to real estate market – I don’t think that the future in China will be a real estate market. 

“They have rebuilt pretty much everything. The future is… high tech – AI, lithium battery, you name it. You need to be active and forward looking to be in those in those countries.” 

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.”