The ranks of global equity managers grappling with the Government Pension Investment Fund of Japan's feast-or-famine fee structure are set to swell this year.
GPIF will move quickly to restructure its active overseas equity lineup, adding managers in an effort to lessen concentration risks and enjoy greater diversification benefits, Eiji Ueda, the Tokyo- based ¥196.6 trillion ($1.45 trillion) pension giant's chief investment officer, said in the annual report the fund released July 1.
Up to ¥2 trillion, or almost $15 billion, could be up for grabs as GPIF — in the wake of across-the-board underperformance by its active foreign equity managers last year — searches for a formula capable of eliciting steadier gains from what remains a 3% sliver of its portfolio but one that can still have an outsized influence on the broader fund's benchmark-relative returns.
In a review of the year that hinted at a surprisingly tactical approach to steering the world's biggest pension fund through recent storms, Mr. Ueda said in response to a rapid rise in volatility during the latter half of the year, he trimmed roughly ¥2 trillion from GPIF's active foreign equity allocations. All seven incumbent managers underperformed, offsetting outperformance by the fund's bond and domestic equity managers and leaving the broader portfolio trailing its policy benchmarks by 6 basis points for the year.
That risk-reduction gambit will provide GPIF with an opportunity to secure greater diversification benefits and lessen concentration risk by adding more equity managers. "We are considering selecting active funds in the North American market, which currently has the most options," he noted.
One Tokyo-based analyst, who declined to be named, said Mr. Ueda's latest comments point to a short-term focus, and considerable sensitivity to periods of "minus alpha."
Mr. Ueda, through a spokeswoman, declined to make any comments above and beyond his two-page review of the year in GPIF's latest annual report.
Ahead of last year's ¥2 trillion shakeup for the sector, three of GPIF's seven incumbent international equity managers had been overseeing more than ¥1.2 trillion each of the fund's allocations, or roughly 65% of a ¥5.7 trillion active portfolio. Passive foreign equity managers ran another ¥42.8 trillion.
The March 31 close of the latest fiscal year found the pie being distributed more evenly among GPIF's five managers with MSCI World ex-Japan benchmarks:
GPIF's two managers with emerging markets benchmarks — Allspring Global Investments and Lazard Asset Management — each saw reductions of about 10%.
GPIF ended the fiscal year with ¥4.7 trillion in active global equity allocations, down from ¥5.7 trillion the year before, with the MSCI World ex-Japan index's almost 23% gain for the 12 months through March 31 apparently offsetting some of that ¥2 trillion reduction.
A GPIF spokeswoman confirmed that, with the fund maintaining a registration system that allows money managers to provide GPIF with updated information about their businesses, no RFP will be required to move forward with those plans. It remains unclear, meanwhile, whether all of the ¥2 trillion will be redirected to newly hired managers, she said.
For managers registered with GPIF selected to discuss possible mandates, an ability to deal with considerable business revenue volatility may prove essential under fee arrangements introduced in April 2018 by Mr. Ueda's predecessor, Hiromichi Mizuno, and, some contend, made even more challenging by Mr. Ueda's tweaks to the system.
At the time, Mr. Mizuno said the new system — which boosted the potential revenue windfalls money managers could look forward to for benchmark-topping returns while offering only passive fees for weaker outcomes — was needed to achieve a better alignment of interests.
And better alignment, he said, was a precondition for GPIF allocating more to active managers, which at the time were overseeing 14% of the fund's total allocations to overseas equities, a level that has dropped to about 9%.
GPIF's latest annual report showed returns since the organization's official launch 16 years ago trailing its policy benchmarks by 3 basis points — suggesting the pension fund has yet to prove that it can use active management to its advantage.
The past two years, meanwhile, have provided a stark snapshot of the whiplash equity managers can face under GPIF's fee arrangements.
With the global market sell-off during the final quarter of GPIF's March 31 fiscal year, the fees the fund paid out to more than 50 active and passive money managers plunged to ¥35.2 billion from a record ¥61.1 billion the year before — a more than 40% drop amounting to $187 million.
Mr. Ueda said GPIF's seven overseas equity managers, as a group, stood out as the latest year's worst performers. Those equity managers suffered the sharpest falloff in fee revenues for the year, among the four asset segments — domestic and overseas stocks and bonds — that account for roughly 25% each of GPIF's assets.
Overseas equity managers — passive as well as active — saw their combined revenues for managing ¥50.8 trillion of GPIF assets plunge 72% to ¥5.3 billion from ¥18.8 billion the year before.
Other segments fared better. Domestic bond manager fees rose 13% to ¥3.4 billion; overseas bond manager revenues slipped 27% to ¥18.6 billion; and domestic equity managers suffered a 53% drop to ¥6 billion.
Incumbent managers who could serve as poster children for the feast-or-famine nature of GPIF's fee experiment — judging by the rolling three-year, manager-specific fee payout numbers the fund releases once a year in its annual report — include Edinburgh-based Baillie Gifford and New York-based Lazard Asset Management.
For the fiscal year ended March 31, 2021, when Baillie Gifford topped its MSCI World ex-Japan benchmark by a whopping 19.4 percentage points, its fee revenues spiked to ¥14.4 billion for the three years through that date, up from ¥3.7 billion for the three years through March 31, 2020.
While the math can only be tied down so far, that suggests the manager's fees for the prior year came to close to ¥12 billion — pointing to a revenue margin on the firm's ¥1.2 trillion portfolio for GPIF that year of more than 80 basis points.
For the year just ended, by contrast, Baillie Gifford trailed its benchmark by 21.1 percentage points and its fees for the three years through March 31 edged up to only ¥14.8 billion — suggesting a plunge in its margins.
A Baillie Gifford spokeswoman didn't immediately respond to requests for comment.
Similarly, Lazard — one of a few GPIF managers whose one-year fee numbers can be calculated with some precision because their mandates predate the March 2016 fiscal year when the fund switched to offering only three-year figures — saw its fees surge more than tenfold to ¥530 million for the March 2021 fiscal year after outperforming its MSCI Emerging Markets index by 12.8 percentage points. That equates to an earnings margin of more than 60 basis points.
For the year just concluded, however, Lazard trailed its benchmark by 7.24 percentage points, and its fee revenues plunged to ¥53.2 million, for a margin of less than 7 basis points.
Other managers whose one-year fee totals can be calculated include MFS and Walter Scott, which had earnings margins of roughly 4 basis points for respective mandates of ¥777.5 billion and ¥627.6 billion.
Managers talking with GPIF this year about new allocations, meanwhile, may find the fee arrangements being offered less compelling than those enjoyed by incumbents. Under Mr. Ueda, who became CIO two years ago, an element of GPIF's fee structure Mr. Mizuno had depicted as essential — awarding managers contracts that extend over a market cycle of five years or so — has been abandoned, according to analysts who declined to be named.
The security that long-term contracts provide managers would allow them to stick with investments that pay off over the long term even if the market moves against them for a year or two, Mr. Mizuno contended.
GPIF kept the basic fee arrangements but it has broken its promise to extend five-year contracts, changing it to one year, said the Tokyo-based analyst who declined to be named.
The GPIF spokeswoman said existing long-term contracts with managers as of the fiscal year ended March 2021 will be honored.
