Signs that Japanese regulators are seeking ways to boost returns of the country's huge public pension fund could eventually open new opportunities for foreign asset managers in areas such as absolute return and alternatives.
Executives with foreign and domestic managers alike said recommendations in May by Japan's Council on Economic and Fiscal Policy for managing the ¥150 trillion ($1.4 trillion) Government Pension Investment Fund, Tokyo, are early steps in a process that could see more of that fund's assets moved from low-yielding Japanese government bonds to actively managed and absolute-return strategies.
Foreign managers already have benefited in recent years from 2001 reforms that boosted the amount of Japanese pension assets outsourced to external managers.
According to Tokyo-based Nomura Research Institute Ltd.'s 2007 review of Japan's asset management sector, Barclays Global Investors, San Francisco, was the biggest asset gatherer over the four-year period ended March 31, 2007, garnering ¥11 trillion, followed by Boston-based State Street Global Advisors, with ¥5 trillion.
In third place was Nomura Asset Management, with ¥3.5 trillion, followed by three more foreign managers with between ¥2.5 trillion and ¥3.5 trillion in Japanese pension assets apiece: Pacific Investment Management Co., Newport Beach, Calif.; Morgan Stanley Asset Management, New York; and AllianceBernstein LP, New York. JPMorgan Asset Management, New York, and Fidelity Investments, Boston, also were among the top 10 asset gatherers. All seven foreign firms manage money for the GPIF.
The 80% of GPIF assets in passive strategies has benefited indexing giants BGI and SSgA, while other foreign players have attracted assets for their expertise in active foreign equities and bonds.
Average GPIF investment returns of roughly 3% a year over the past five years have met or exceeded the statutory target of 3.2%, but with a population profile that has left Japan's working-age population declining by hundreds of thousands of people every year, pressure to boost returns can only grow.
“There's definitely a feeling of change in the air” that could eventually lead to more assets being allocated to strategies with greater potential to generate alpha, said Paul Price, the Dublin-based global head of institutional business with Pioneer Investments.
Pioneer doesn't manage GPIF money now, but the company is making the long-term commitment to the Japanese market needed to earn the trust of the country's most sophisticated institutional investors, he said.