Masataka Miyazono, president of the Government Pension Investment Fund.
Japan's Government Pension Investment Fund isn't into trend following — at least when it comes to the number of money managers the ¥219.2 trillion ($1.51 trillion) Tokyo-based giant is looking to do business with.
At a time when big asset owners are engaged in what BlackRock Inc. CEO Larry Fink recently termed a "long-term shift in client consolidation of their investment managers," the world's biggest pension fund is moving decidedly in the opposite direction.
Over the past year, GPIF has more than quadrupled its lineup of active foreign equity managers to about 30 from seven, adding 16 focused on U.S.-listed stocks in October — vetted using quantitative, data-driven screens of manager skill — and another 13 in June, focused more broadly on developed market stocks ex-Japan.
The two lists contain some overlap, with a few managers garnering GPIF mandates for both U.S. and developed market equities.
On Aug. 9, GPIF released the names of its latest hires, with heavyweights such as BlackRock and J.P. Morgan Asset Management (U.K.) Ltd. rubbing elbows with smaller firms, among them Osmosis Investment Management U.K. Ltd., a London-based sustainable investing boutique with $13.6 billion in assets under management, and Montreal-based Montrusco Bolton Investments Inc., with $10.7 billion.
At the same time, GPIF announced contract extensions for three of its seven legacy managers: Allspring Global Investments, Baillie Gifford Overseas and Lazard Asset Management.
The same pattern prevailed earlier in January when GPIF released details of its 16 new U.S.-focused managers. Household names such as Fidelity Institutional Asset Management and T. Rowe Price Associates shared the spotlight with boutiques such as Applied Finance Capital Management LLC, a $2.5 billion San Juan, Puerto Rico-based U.S. equities manager, and Jacobs Levy Equity Management, a Florham Park, N.Y.-based manager with $12.9 billion in assets.
GPIF's hiring spree followed weak performance the year before by the fund's seven incumbent managers — Allspring, MFS Investment Management, Intech Investment Management, Walter Scott & Partners, Baillie Gifford Overseas, UBS Asset Management (U.K.) and Lazard Asset Management — which prompted Eiji Ueda, the fund's chief investment officer, in his review of the fiscal year ended March 31, 2022, to call for urgent steps to "increase the number of active funds GPIF employs" as quickly as possible.
The restructuring, meanwhile, won't stop with overseas equities.
Mr. Ueda, in an emailed response to questions, said the same kind of makeover — spreading active allocations across an expanded roster of managers — could be extended next to Japanese equities as well as domestic and overseas bonds.
Whether money managers welcome or lament those changes appears to depend in large part on whether they worked for GPIF during the salad days when the pension giant was handing out mandates as large as ¥1.2 trillion, or $10 billion at prevailing exchange rates, as it did for Intech, Baillie Gifford and UBS Asset Management (U.K.) for the fiscal year ended March 31, 2021.
An executive with one manager which has looked after multibillion-dollar mandates for GPIF, who declined to be named, said the allure of working with the giant pension fund has been much diminished, in line with the reduced scale of its mandates.
By contrast, the head of one boutique that garnered a first-time GPIF mandate of less than a $1 billion last year, who likewise declined to be named, called the arrangement a very attractive one for any manager confident in its ability to deliver alpha over a cycle.
But if GPIF went to considerable lengths to restructure its active foreign equities portfolio over the past year, it didn't appear to pull out all the stops to amplify the impact of those changes in terms of moving the needle for the broader portfolio. Active allocations for the fiscal year ended March 31 fell to a historic low of ¥3.2 trillion, or 1.61% of the portfolio, down from ¥4.7 trillion the year before and ¥5.7 trillion the year before that.
Asked about the seeming contradiction, Mr. Ueda called the roughly ¥2 trillion GPIF divvied up last year among its new managers "just the beginning."
"We would like to allocate more to equity active fund managers as long as we have reasonable evidence and confidence that this effort will improve (the) risk return of our portfolio," he said.
GPIF has pursued initiatives in the past aimed at squeezing more consistent alpha from the fund's active allocations, such as the introduction in 2018 of a performance fee structure meant to better align the interests of managers with the fund. Until now, however, returns have remained volatile — especially for foreign equities: GPIF's latest annual report showed the fund's active foreign equity managers trailing their benchmarks by 1.57 percentage points for the 12 months through March 31 and by an annualized 53 basis points for the past 10 years.
But if active returns remain mixed, Mr. Ueda, in his review for the latest fiscal year ended March 31, called the continued pursuit of alpha crucial for a fund that can add ¥200 billion to its portfolio with only 10 basis points of outperformance.
This time around, however, GPIF will take a broader approach to that pursuit — for example, not simply looking at the extent to which the fund's active managers exceed their benchmarks but expanding its focus to target "aggregate" returns from mandates and passive exposures that are being sliced and diced more finely than in decades past, he said.
Until the latest year, almost all of GPIF's active foreign equity allocations were benchmarked to broad MSCI indexes — either the MSCI World ex-Japan index or the MSCI All Country World Index ex-Japan. The annual report's breakdown of mandates as of March 31, by contrast, showed GPIF's newly hired U.S. equity managers benchmarked against the S&P 500 and a range of FTSE Russell growth and value indexes. On the passive side as well, new mandates were benchmarked to indexes such as the MSCI U.S. 100, MSCI Canada, and MSCI U.S. Large Cap Growth and MSCI Large Cap Value.
Masataka Miyazono, GPIF's president, at a recent news briefing said the fund will utilize that expanded array of passive exposures to allow for a more active approach to allocating capital, with an eye to controlling risk and seeking excess returns.
Mr. Ueda, by way of example, noted in his email that "the performance of the S&P 500 is determined by a limited number of mega-cap names but we found that there are some excellent active equity fund managers who can select good performing stocks outside of those mega-cap names. It is better for us to work with those managers and have risk adjusted passive funds like (the) MSCI U.S. 100."
This time around, GPIF executives say plans to build a world-class data analytics capability will lay the groundwork for the fund's broader push to eke out additional gains across its portfolio without a corresponding increase in risk.
While the global reach of GPIF's portfolio gives the fund a material advantage in collecting data, data science analytical capabilities will eventually bring benefits "not only in manager selection but also in rebalancing, index selection and others," Mr. Ueda said.
On the manager selection front, GPIF appears to be relying for now on New York-based Applied Academics, a low profile, data-driven consulting firm GPIF hired last year to quarterback its manager lineup restructuring.
Executives at a number of money management firms report being vetted by Applied Academics, with one — who declined to be named — saying as part of that due diligence, the consultant asked his firm to detail every trade they ever made.
A spokeswoman for Applied Academics declined comment.
Mr. Ueda, in his latest annual review, said in the process of selecting active managers, GPIF is able to obtain data from each and through extensive simulations of both the choices they make as well as those they didn't make, come up with a quantitative assessment of each manager's skill. "In the future, we would like to extend the same method to active equity funds in other regions and other asset classes, using GPIF's data acquisition and analysis capabilities to improve the portfolio's balance of risk and return," he added.
Meanwhile, GPIF's latest annual report showed Mr. Ueda's team adding other levers for making active decisions in managing the fund's huge portfolio.
The biggest move in terms of portfolio assets was switching the mandate for a ¥9 trillion in-house domestic bond fund to active management from passive — singlehandedly boosting the actively managed portion of GPIF's portfolio to 16.12% from 14.39% despite declines last year in the active totals for foreign stocks and bonds.
Mr. Ueda said that switch shouldn't be seen as the start of a broader push.
"We outsource most of our investments to external asset managers and this is likely to remain the same," Mr. Ueda said. But, he added, because each manager's mandate is only to optimize their own portfolios, "sometimes we need to finetune" the broader portfolio's risk-return balance. The switch of that ¥9 trillion in-house pool to active management "is one of our current best efforts to optimize our overall portfolio risk management," he said.
In another recent move, GPIF announced its first direct commitments to private equity and real estate general partners after six years of dealing almost exclusively with funds-of-funds managers.
GPIF hasn't entirely moved beyond funds-of-funds vehicles but going forward the focus will be on direct allocations, which "make our risk management easier," he said.
As of the quarter ended June 30, GPIF reported 1.47% of its portfolio, or ¥3.22 trillion, allocated to private infrastructure, real estate and private equity. That leaves 3.53% of the portfolio's overall 5% ceiling for alternatives allocations, or roughly $53 billion, left to be put to work.
