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Pension Funds

Japan’s GPIF to introduce performance fees for active managers in April

GPIF Chief Investment Officer Hiromichi Mizuno
GPIF Chief Investment Officer Hiromichi Mizuno

Japan's Government Pension Investment Fund will introduce performance-based fees for all of its active equity and bond managers at the April 1 start of the coming fiscal year, a Tokyo-based spokeswoman for the 162.8 trillion ($1.54 trillion) pension fund confirmed Monday.

The fee structure in place now has allowed external managers to choose between a fixed fee and a performance fee capped at a maximum rate.

The spokeswoman declined to say how many of the fund's 13 active domestic equity managers and 11 active overseas equity managers have opted for the fixed-fee arrangement.

Starting next month, performance-based fees — with no maximum fee rate — will be introduced across the fund's manager lineups for domestic and overseas equities. The specifics of the new fee arrangements weren't revealed.

The GPIF made an initial push in the direction of performance fees in October 2015 when the fund tripled its lineup of active offshore bond managers, with performance fees for all 21 firms hired.

Under the new system, managers that don't deliver excess returns over the long term — based on "market cycles for each strategy" — will garner fees on par with those paid to passive managers overseeing similarly sized mandates, according to a statement on GPIF's new fee arrangements emailed by the spokeswoman.

Over the past year or so, GPIF executives have made achieving a better alignment of interests with the fund's external managers a priority.

The fund's latest annual report showed GPIF's overseas equities managers, as a group, underperforming their benchmarks by 48 basis points to 58 basis points for the five- and 10-year periods ended March 31, 2017. Domestic managers added 23 basis points for the past five years but trailed by 4 basis points for the 10-year period.

Hiromichi Mizuno, GPIF's chief investment officer, noted in a November interview that a number of the fund's external managers weren't making full use of the agreed-upon risk budget, despite assurances that as a long-term investor the GPIF wouldn't be overly concerned about short-term fluctuations.

At the time, Mr. Mizuno said his team was making "significant progress" in achieving a better alignment of interests with managers, and that doing so was a precondition "for us to increase active management."