Initial details of Tokyo-based Government Pension Investment Fund's promised revamp of its foreign equities manager lineup emerged last month, suggesting opportunities for a broader range of U.S. equity managers going forward than the ¥189.9 trillion ($1.48 trillion) pension giant has traditionally employed.
A case in point: Applied Finance Capital Management LLC, a $2.5 billion San Juan, Puerto Rico-based U.S. equity boutique.
The firm — one of 16 new money managers the world's largest pension fund announced on Jan. 10 it had hired for active foreign equity mandates — would previously have been unlikely to find itself on the radar screen of a fund that, as of its latest fiscal year ended March 31, 2022, retained just seven managers averaging $5 billion apiece in mandates benchmarked to the MSCI-All Country World index or its variants.
The same could be said of other new hires, such as DuPont Capital Management Corp., a Wilmington, Del.-based firm with AUM of $20.1 billion, and Jacobs Levy Equity Management, a Florham Park, N.J.-based boutique with $12.9 billion in assets.
After GPIF's incumbent managers all trailed their benchmarks for the latest fiscal year, however, fund executives soured on GPIF's concentrated approach to managing its ¥4.7 trillion active foreign equities portfolio.
The resulting drag on performance more than offset positive returns for GPIF's bond and domestic equity allocations — despite the active portion of the fund's ¥50.8 trillion foreign equity holdings being less than a tenth of its ¥46.1 trillion in passive exposures — leaving the broader portfolio's returns 6 basis points short of its composite benchmark for the year.
In the fund's latest annual report, Eiji Ueda, GPIF's chief investment officer, sounded an alarm, saying there was an urgent need to achieve greater diversification by boosting the ranks of GPIF's active managers.
In his review of the year, Mr. Ueda pledged to follow through "as fast as possible," with a focus on the opportunity-rich North American manager universe.
A fuller picture of GPIF's evolving approach — including the amount of assets awarded to each of the fund's new managers — won't emerge until early July, when GPIF's annual report for the fiscal year ending March 31, 2023, comes out, a spokeswoman for the fund said last month.
But with GPIF's 16 new managers joining at least four of the prior year's seven incumbents — Walter Scott & Partners Ltd., INTECH Investment Management LLC, Allspring Global Investments LLC and Lazard Asset Management LLC — listed on Jan. 10 as rehired, the average mandate size, all things equal, should drop to between $1 billion and $2 billion, from between $4 billion and $5 billion for the prior year.
It's already clear, however, that GPIF — in consultation, managers said, with Applied Academics LLC, a low-profile New York-based consulting firm the fund hired in late August to help revamp GPIF's manager lineup —is following a new playbook in restructuring its active foreign equity allocations.
For example, GPIF typically encourages money managers interested in working with it to join the fund's manager registration system, where they can provide GPIF with updated information on their investment strategies — allowing the fund to retain managers as and when needed without having to go through a lengthy RFP process.
But GPIF's quest over the past year to achieve consistent, positive alpha has included more proactive efforts to identify promising managers.
Rafael Resendes, San Juan-based co-founder and partner with Applied Finance, said in an interview that his firm's road to joining GPIF's manager lineup began with a "cryptic" email in the spring of 2022 from a consulting firm that only said it had been hired "by a large pension fund to identify managers."
The consultant, whom Mr. Resendes declined to identify, expressed an interest in Applied Finance's flagship Valuation 50 strategy, powered by models Mr. Resendes and co-founder Daniel James Obrycki developed in 1995 to produce estimates of a company's intrinsic value.
Tokyo-based money management executives, who declined to be named, said that consulting firm is Applied Academics. A spokeswoman for the firm declined comment.
Over the intervening years, 20 million of those "absolute estimates of worth" have allowed Applied Finance to identify stocks with strong prospects even among companies with relatively high price-to-book or price-earnings multiples, as well as companies that remain overvalued despite the seeming attraction of low multiples, Mr. Resendes said.
"We provide an absolute estimate of worth, which is a very different metric and has a very different set of properties than … the traditional multiple-based value manager," he said.
After that initial contact last spring, Mr. Resendes said his team's initial efforts to learn anything it could about the consulting firm came up empty. In subsequent meetings, however, the consultant revealed who the ultimate client was.
From that point forward began "this non-stop, intense due diligence process...with one or two Zoom calls every week from spring through the end of summer," Mr. Resendes said. The level of interest GPIF and its consulting firm showed in understanding Applied Finance's investment framework has been "amazing," he added.
If consistent returns are the goal, meanwhile, Applied Finance's track record could be of interest.
"If you look at the last 12 years, you sort of had a 10-year golden growth window from 2011 to 2020," followed by a value resurgence since 2021, and the Valuation 50 strategy beat the S&P 500 over both time periods, Mr. Resendes noted.
It remains too soon to know whether GPIF's interest in firms such as Applied Finance can set the stage for the giant fund to employ active managers to greater effect than it has in the past.
The March 2022 end of the latest fiscal year showed GPIF continuing a steady retreat from active management of equities. Both the 2.37% share of the portfolio allocated to actively managed foreign equities and the 1.6% share allocated to actively managed domestic equities were the lowest levels since late 2014, when GPIF more than doubled its equity allocation target to half of its portfolio.
Toward the end of the last fiscal year, meanwhile, Mr. Ueda — in his review of the latest fiscal year — said he slashed the fund's active foreign equity exposures by ¥2 trillion to ¥4.7 trillion.
If the restructuring of GPIF's foreign equity manager lineup is meant to have a meaningful impact on its portfolio, it would likely require not only a reversal of the past year's ¥2 trillion reduction but further allocations to active managers as well.
