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GPIF calls on asset owners to seek better alignment of interest with managers

Hiromichi Mizuno, chief investment officer of Japan's 162.7 trillion ($1.5 trillion) Government Pension Investment Fund, Tokyo, called on other asset owners Tuesday to join the GPIF in revamping fee arrangements with money managers in pursuit of a better alignment of interests.

Speaking at the CFA Institute's annual conference in Hong Kong, Mr. Mizuno said GPIF has begun offering multiyear contracts — and a pledge to disregard short-term results along the way — to managers willing to accept fee "clawbacks" at the end of the contract if they fail to produce alpha.

Mr. Mizuno cited the failure of GPIF's active managers to deliver alpha over the past decade or two and the inordinate amount of time his team spent selecting and evaluating those managers as factors deterring him from lifting the actively managed portion of the fund above its current level of roughly 20%.

He described the corporate governance of money management firms, on average, as "horrid."

"So now we are proposing a very basic fee, which is comparable to the fee we pay to passive managers of the same benchmark, and we (give) them very significant participation in the alpha," said Mr. Mizuno. He didn't provide further details.

With that arrangement, "I have confidence that they are working to create alpha for us, so that structure gives me more confidence in the alignment of interest," he added.

Mr. Mizuno described GPIF's fee gambit as an attempt to break a "vicious" cycle of criticism among key players in the investment food chain that finds each blame the others for the "short termism" inhibiting better outcomes.

Asset managers accuse executives of the companies they invest in as being too focused on short-term results, and the company executives throw the same complaint at the managers, Mr. Mizuno said.

The asset managers, in turn, blame asset owners for giving them a check "at the peak of the market" and taking the money out at the bottom, before they have a chance to prove themselves, he added.

With its new fee structure, the GPIF is effectively "taking that challenge," ameliorating those fee arrangements managers contend stand in their way of taking a long-term approach to investing, said Mr. Mizuno.

If there's any systemic reason inhibiting asset managers from proving themselves, "we'll try to take it away," he said. So "we are now proposing multiyear commitments to public equity and public fixed-income managers if they agree at the end of the term you have to pay back the fee if you don't deliver what you propose," he said.

GPIF has taken short-term performance "totally out of the evaluation methodology, so managers should feel no pressure if they have a bad quarter," Mr. Mizuno said.

He called on other institutional investors to join the GPIF in its efforts to combat a focus on short-term results. "We are asking for the collaboration among other asset owners to solve that," he said.