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Pension Funds

GPIF sets new path for managers

Norihiro Takahashi wants to ‘enhance alignment of interests’ between the fund and managers.

Japanese fund seeks stronger relationship with firms that deliver

The world's largest pension fund is working toward a new deal for external managers that could provide more upside for those firms capable of delivering strong long-term results.

Speaking Jan. 16 at Hong Kong's annual Asian Financial Forum, Norihiro Takahashi, president of Japan's Government Pension Investment Fund, said ensuring alignment of interests between the 132.1 trillion ($1.3 trillion) Tokyo-based fund and its external managers is “crucial.”

Noting the GPIF's growing use of performance-based fees, Mr. Takahashi, a former head of Japan's Norinchukin Bank who took the helm at GPIF last March, pledged continued efforts “to enhance (that) alignment of interests.”

In an interview later that day, Mr. Takahashi suggested that strenuous efforts in previous years by executives of the national pension fund to minimize fee payouts to managers had perhaps been too successful, to the point of effectively undermining that alignment of interests.

The 38.3 billion in payments to external managers the GPIF reported for the fiscal year ended March 31, 2016, amounted to a scant three basis points of the portfolio's closing investment value of 134.7 trillion. That marked a rise of only one basis point from the two-basis-point average for the year ended March 31, 2014, despite an October 2014 shift into risk assets that saw the fund's target for publicly traded equities more than double to 50%.

Some of the GPIF's managers, speaking on condition of anonymity, said the pension giant's performance-fee arrangements offer limited upside, even for stellar returns, with little or no difference in potential gains from the previous, regular fee structure.

Mr. Takahashi conceded the constraints on potential upside for managers, but noted current performance-fee structures are very much a work in progress, and open to adjustment.

Cementing long-term relationships with the best asset managers is a priority for GPIF, said Mr. Takahashi. He added he's hoping to be able to use improved fee arrangements - such as offering additional rewards for managers capable of delivering three consecutive years of strong results - as one tool in building such relationships.

Industry analysts say one potential change GPIF executives are exploring would call for providing further incentives for outperformance while adding clawbacks or penalties for underperformance.

While GPIF officials and the fund's consultants have looked at that idea, Mr. Takahashi noted only arrangements that can get buy-in from managers are likely to work out well. He reiterated the aim of studying that option wasn't to contain or lower GPIF's fee payments, but to hammer out arrangements that could strengthen the fund's relationships with key managers.

Meanwhile, with 80% or more of GPIF's allocations to stocks and bonds in passively managed strategies, and more of the fund's actively managed domestic equity allocations moving to strategies tasked with matching rather than beating smart beta indexes, Mr. Takahashi said performance-related fees should be considered for passive managers as well.

That would effectively mean shifting from pure passive strategies into enhanced indexing, asking managers to take on a modicum of risk in pursuit of incremental returns, for which they too could garner performance fees, he said.

GPIF's latest annual listing of fees it paid to specific managers showed an 85% plunge in payments to managers of passive Japanese equities for the fiscal year ended March 2015.

For the year ended March 31, 2016, GPIF began offering fee data for the latest three years, rather than the latest year. An analysis of that data suggested the fees managers obtained for the most recent fiscal year were largely in line with the prior year's figures. It remains unclear to what extent managers were able to offset that decline via the securities lending program the fund introduced that year.

This article originally appeared in the January 23, 2017 print issue as, "GPIF sets new path for managers".