Under the performance-based fee framework GPIF introduced for all external managers in April 2018, active managers who fail to beat their benchmarks only receive fees equivalent to what a passive strategy for their asset class would get.
For managers beating their benchmarks, fees increase in relation to the alpha they deliver, reaching the level GPIF paid under the prior fixed-fee system only if a manager achieves the target return agreed upon in discussions with GPIF, said Naori Honda, a GPIF spokeswoman.
If managers exceed their alpha targets, GPIF will pay more than what it paid under the prior system — a situation beneficial to both sides, Ms. Honda said.
Under the new system, then, GPIF's target return negotiations with managers are the main arena for both side's efforts to tilt the system in their favor. Managers have incentive to set targets as low as they can without hurting their ability to win mandates. By contrast, GPIF's interests are better served by setting targets as high as possible without scaring off managers.
Market veterans speculate that the absence of Boston-based money management giant Wellington Management Co. from GPIF's latest list of foreign equity managers — for the first time in five years — is a case of a manager walking away from the new system. GPIF's Ms. Honda and Sara Lou Sherman, a Wellington spokeswoman, both declined comment.
All other things equal, last year's 40% plunge in fee payouts suggests GPIF dominated those target-return negotiations.
The annual report — the one time each year GPIF provides information about the performance of specific managers and the fees it pays them — showed managers of 25 of the fund's 49 active bond and equity mandates failing to beat their benchmarks for the 12 months through March 31.
The hit to those managers' fees has been dramatic.
For example, according to Pensions & Investments' calculations, Pacific Investment Management Co. — the only manager among nine overseeing active domestic bond mandates to trail its benchmark last year — saw its fees for managing ¥551.2 billion in Japanese government bonds plunge 89%. The Newport Beach, Calif.-based bond giant's fees dropped to ¥58.6 million, or a little over one basis point of its portfolio, from ¥522.4 million for the year ended March 31, 2018.
A PIMCO spokeswoman declined comment.
(From the fiscal year ended March 2016, GPIF switched to providing manager-specific fee figures for three-year periods, ending its practice of releasing single-year fee data. Single-year fee data for managers with mandates dating back to the fiscal year ended March 2014 can still be calculated; fees for managers with more recent mandates can only be judged on the basis of rolling three-year averages.)
Even Manulife Asset Management (Japan) Ltd., which topped that group of nine active domestic bond managers for the past year with 78 basis points of alpha, apparently still fell short of its target. According to P&I's calculations, the fees Manulife garnered dropped 21% to ¥189.2 million, or roughly 4.4 basis points on a ¥427.5 billion mandate. A Manulife spokesman declined comment.
Of GPIF's four principal asset segments — domestic and overseas stocks and bonds — domestic and overseas bonds, with ¥42.3 trillion and ¥27.8 trillion, respectively, of the fund's portfolio saw the sharpest drops in manager fees. Fees for domestic bond managers plunged 60% from the year before to ¥1.6 billion, while overseas bond managers saw fees drop by 47% to ¥7.5 billion.
Only six of the managers overseeing GPIF's 18 active foreign bond mandates managed to beat their benchmarks for the past year.
BlackRock Inc., toward the middle of the pack last year among GPIF's active overseas bond managers, trailing its benchmark by 67 basis points, saw its fees — again according to P&I's calculations — tumble 74% from the year before to ¥109.1 million, roughly equal to 2.4 basis points on its ¥447.6 billion portfolio. A BlackRock spokeswoman in Tokyo declined comment.
But the year wasn't without success stories. Among GPIF's 14 active domestic equity managers, Atlanta-based Invesco Ltd. and Austin, Texas-based Dimensional Fund Advisors LP beat their one-year benchmarks by 7.1 and 7 percentage points respectively, more than 4.5 percentage points better than the next-best performer.
Invesco saw its three-year average fee improve to ¥570 million from ¥423 million the year before, while DFA — subadvising a GPIF strategy for Tokyo-based Nomura Asset Management — boosted the three-year average for fees being split by Nomura and DFA to ¥460.9 million from ¥328.8 million.
Similarly, UBS Asset Management, Zurich — top performer among GPIF's eight active overseas equity managers last year with alpha of 5.51 percentage points — saw its three-year average fee jump to ¥2 billion from ¥1.45 billion.
Even so, on the whole, the fees GPIF shelled out last year declined for every asset class. Managers of overseas equities took in ¥10.7 billion in fees, down 37% from the year before, while domestic equity managers saw a 29% drop to ¥7.5 trillion.
Tokyo-based money management executives — firms currently managing money for GPIF and potential managers alike — called the new system a considerably tougher environment for them.
Business could prove especially challenging for firms that start off with a bad year. GPIF will carry forward any losses, leaving them underwater and potentially earning passive fees for a number of years, noted an executive with one of GPIF's current external managers, who declined to be named.
The head of Japanese institutional sales for another foreign manager in Tokyo not managing money currently for GPIF, who likewise declined to be named, said in this new environment, bulge-bracket managers with scale will be much better placed to respond to GPIF's extensive client service demands — leveraging revenues earned from other clients to tide them over should they face years of passive fees with GPIF.
For smaller firms, which might have to hire another client service professional or two to handle a GPIF mandate, the calculus for considering whether to bid for GPIF's business has become a lot tougher, said the institutional salesman.
Even so, GPIF controls such a large part of the market that most firms will probably pursue the business and "see how it goes," he said. At current fee levels, however, it's hard to anticipate a "win-win" situation, he added.
