The most recent results from GPIF's high-profile experiment with fee payouts should be reassuring for active money managers, at least those that can somewhat afford to live on the edge.
Some three years ago, the ¥186.2 trillion ($1.7 trillion) Government Pension Investment Fund moved to achieve a better alignment of interests with its external managers, instituting higher performance fees but only passive payouts for managers that fail to top their benchmarks.
The move, GPIF executives insisted, was designed to spawn more alpha rather than drive down fees. GPIF's new approach underscores a necessary focus on performance as pension funds confront multiple challenges.
For the fiscal year ended March 31, marked by pandemic-fueled volatility, GPIF's annual report showed managers were able to share in the portfolio's stellar 25% gain for the year: They collected a record ¥61 billion in fees, nearly double the ¥31.9 billion paid in the previous fiscal year. Indeed, more than 80% of the fund's 50-some active managers outperformed their benchmarks. The approach could serve as a model for other asset owners, especially the largest ones that can throw their weight around in fee negotiations.
To be sure, the almost across the board outperformance of GPIF's more than 20 overseas bond managers for the most recent year, after almost equally across the board underperformance the year before, points to macro influences for that about-face in performance. In this case, that influence was the intersection of GPIF's decision to boost its asset allocation target for foreign bonds to 25% from 15% starting April 1, 2020, at the expense of domestic bonds, and the market impact of the pandemic.
But while fortune favored active managers under these market conditions — with several garnering tens of millions in added fees — GPIF's feast-or-famine payout structure will continue to loom large for managers. The previous year's big outperformer, Walter Scott & Partners Ltd., underperformed its global equity benchmark in the latest fiscal year and saw its one-year fee total fall by $35 million to $1.8 million.
Moving forward, managers might have to consider focusing more on other potential business segments with steadier revenue streams, such as wealth management or serving retail investors, as performance-focused institutional flows become ever-more volatile.
But as last year shows, the rewards are there for savvy managers at the happy confluence of skill and market trends.