GPIF to focus on manager selection and ESG push

The $1.4 trillion Japanese pension fund is moving into a more dynamic manager selection process and integrating ESG factors in its investments as it hopes to become a role model for Japanese investors.

Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, needs to have access to the best performing asset managers to gain their expertise, according to president Norihiro Takahashi.

“GPIF receives money from employees and employers and subsequently invests back into those companies through external managers. It is very important for us to optimise this investment chain and it is a huge job for an asset owner of our scale to have in-house investment capabilities,” Takahashi said at the Asian Financial Forum held in Hong Kong on Monday.

That is the reason why, as Takahashi pointed out, corporate governance of GPIF’s external asset managers and the alignment of interests is crucial.

GPIF, which manages $1.4 trillion for Japanese pensioners, had a portfolio loss of ¥5.3 trillion ($52 billion; €47 billion) in fiscal 2015 driven by disappointing returns from its holdings of domestic equities, which fell 10.8 percent, the pension fund said in its latest annual report released end July 2016.

The pensions fund’s policy asset mix introduced two years ago allocates up to 50 percent to equities and the remaining 50 percent to fixed income. GPIF is also targeting a 5 percent allocation to alternatives. However, as of March 2016, it had only invested about 0.06 percent in alternatives, with ¥1.9 billion in private equity and ¥81.4 billion in infrastructure through co-investments with external institutional investors, the fund said in a report.

However, Takahashi pointed out that the GPIF has taken a more proactive stance in recent years in rebalancing its portfolio.

“We used to have three manager selection cycles, but lately we used the asset manager acceleration system, in which we could add or increase managers much more dynamically,” he said. “We also introduced an “information only scheme” which allows foreign external managers to work with us. Unlike previously where asset managers need to be licenced by the Japanese Financial Services Agency, anyone who does not have such qualification can still submit their fund information for our review.”

In 2015, GPIF also introduced a performance-based fee structure to provide greater incentive for external managers. In the past the fund made commitments across different asset classes to global managers, including BlackRock Japan, State Street Global Advisers, AllianceBernstein and Mizuho Asset Management.

Takahashi added that another focus area in GPIF’s “evolution” is its environmental, social and governance-focused activities.

In line with the practices of reserve funds in Canada, Norway and Sweden, GPIF became a signatory to the United Nations-backed Principles for Responsible Investment (PRI) in September 2015. And in November last year, GPIF’s chief investment officer Hiromichi Mizuno joined PRI's board. In addition, the pension fund also joined the UK 30% Club and the US Thirty Percent Coalition in November to demonstrate its belief in gender diversity, according to Takahashi.

The GPIF also held a forum in the same month with global asset owners including the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the Ontario Teachers’ Pension Plan and APG Asset Management to exchange ideas and best practices on ESG issues.

Takahashi reiterated GPIF’s belief that integrating ESG factors into its investment process will help in mitigating risk.

“As a significant and longstanding partner we demand our external asset managers to conduct better stewardship activities for us. We believe that long-term investment returns should be achieved by enhancing corporate value and through capital market exchange, which results in a win-win situation for all parties in our investment chain.”

Photo from the Asian Financial Forum