Japanese pensions wait for ‘big brother’ to make first move

A recent decision to postpone direct investing in public equities by Japan’s Government Pension Investment Fund highlights the pension fund’s conservative approach and a follow-the-leader mentality among pension funds in Japan, market participants tell PEI.

An advisory committee at Japan’s Health and Welfare Ministry has decided not to lift the current ban on Japan’s Government Pension Investment Fund (GPIF) investing directly in stocks, despite proposals from the giant fund that the practice should be reviewed. The move has been viewed as a brake on the trillion dollar fund’s investment ambitions, including into alternatives.

GPIF’s peers are keenly awaiting the pension fund to shift money into alternatives, one Tokyo-based fund manager told Private Equity International. “When ‘big brother’ starts investing in alternatives, that’s when other Japanese pension funds will follow,” he said.

After a strategy and governance revamp in 2014 and growing pressure to drive up better returns, GPIF had announced it would diversify into private equity, real estate and infrastructure and allocate as much as five percent of its portfolio to alternatives. It also hired Hiromichi Mizuno, a former partner of London-based private equity firm Coller Capital as its first head of investment in July 2014 and started the search for in-house investment managers for alternatives, as reported by PEI.

In the same year, the pension fund launched an infrastructure investment programme and announced a co-investment agreement with the Ontario Municipal Employees Retirement System (OMERS) and the Development Bank of Japan.

GPIF has taken the view that the best way to do private equity is to take the Canadian model, to do co-investments, to have more leverage on their ability to push down management fees, a local source with knowledge of the situation told PEI.

However, speaking of GPIF’s direct investments in public equities, he noted “the advisory committee is saying you need to slow down a bit, you need to prove to us that you know what you are doing, you need to make sure you have the right internal resources to take on this kind of work – that’s part of the rationale behind this decision.”

Despite its proposal to lift the ban on direct investing, the pension fund, which has JPY 140 trillion ($1.18 trillion; €1.14 trillion) in assets, will continue to rely on third-party asset managers for direct investments in public equities until the debate resumes in 2019. According to the fund’s website, equities accounted for about 43 percent of its portfolio at the end of September 2015. Its allocation to alternatives stood at 0.5 percent, with a maximum ceiling of 5 percent of its total portfolio.

“It’s a positive thing that GPIF is aware of the fact that it is behind and needs to catch up with other large pensions and endowments overseas,” said Gregory Hara, chief executive officer and managing partner of Japanese mid-market private equity firm J-STAR. “Having the capability to make direct investment means having the power to make decisions internally, which requires ability and governance. Being such a large pension, it is inefficient that GPIF is not allowed to manage its capital on its own and in that way, its internal resources will not gain experience.”

Business lobby groups the Japan Business Federation and the Japanese Trade Union Confederation opposed lifting the ban, saying that such a move could lead to direct control of private companies by the state-affiliated institution, reports Jiji.

Four asset managers are currently managing the pension’s active domestic and foreign equities. GPIF selected Schroder Investment Management (Japan), Daiwa SB Investments and Nomura Asset Management for domestic active stock mandates, and UBS Global Asset Management (Japan) for foreign active holdings, according to a statement on its website.

Other investment managers GPIF is working with include Goldman Sachs Asset Management, BNY Mellon Asset Management Japan Limited, PIMCO Japan and BlackRock Japan, among others.