GPIF names global bond managers, outlines strategy

Japan’s $1.2 trillion Government Pension Investment Fund (GPIF) has revealed its managers for new global fixed income mandates and issued guidance on expanded investment operations. It also confirmed it has signed up to the UN's principles for responsible investment (PRI). 

GPIF has set up eight categories of active fixed income investment, including global, US and Euro aggregate; US and Euro high yield; emerging markets local and hard currency; and inflation-linked. It has selected 21 active managers and six passive managers across these segments.

The world’s largest pension fund has raised active allocations in the past year under the guidance of new CIO Hiromichi Mizuno. In particular it has set out to reduce domestic bond exposure to 35%, from 60% previously, and to double domestic and international equities exposure to 25% each.

The managers chosen for global aggregate are Goldman Sachs Asset Management, Schroder Investment Management, Sompo Japan Nipponkoa, Nomura Asset Management, BNY Mellon Asset Management, Pimco, BlackRock, Prudential Investment Management, Manulife Asset Management, Mizuho Asset Management, Morgan Stanley Investment Management and Legg Mason Asset Management.

For US aggregate, the managers are Diam and Pyramis. For high yield, Nomura has two separate mandates, one for its US subsidiary and the other to sub-adviser Mackay Shields. For Euro aggregate, BNY Mellon affiliate Insight Investment Management is the sole manager; and for euro high yield, UBS Global Asset Management gets the only mandate.

Ashmore is to manage an emerging markets local currency portfolio for GPIF and Alliance Bernstein a hard currency EM mandate. BNP Paribas affiliate Fischer Francis Trees & Watts will manage the inflation-linked bond mandate.

In addition, GPIF has selected State Street Global Advisers, Nomura, BlackRock, Mizuho, Sumitomo Mitsui and Resona Bank to manage passive bond portfolios all benchmarked to Citi World Government Bond Index, unhedged.

According to analysis by the Japan Pensions Industry Database, “two losers are Tokio Marine which has disappeared from the active list and Northern Trust, which is gone from the passive.”

In the global aggregate component, BNY Mellon, Goldman Sachs, Legg Mason, Manulife, Nomura, Prudential, Schroders and Sompo are new to the GPIF manager roster. In the worldwide passive group, Nomura and Resona Bank are also new.

A source close to the GPIF said the amount awarded in each mandate was confidential, not to be made publicly available before next March. 

Commenting on the overhaul of GPIF’s policy asset mix, the fund’s president Takahiro Mitani said: “We intensively examined the policy asset mix and considered in particular that Japan is about to transform itself from an economy of persistent deflation and that domestic bonds, which had accounted for the majority of investment assets until then, are expected to yield significantly lower. As a result, the new policy asset mix has become more diversified than the previous one.”

The assumed investment horizon of the fund is 25 years. Beyond that, GPIF says the reserve assets are expected to start declining “and investment policy should be more focused on the preservation of liquidity”.

Given the actuarial valuation, the reserve assets must achieve a 1.7% real return. Future real long-term interest rates are set to be 2.7% in the investment committee’s "upside scenario" and 1.9% in its "downside scenario". Future inflation rates are set to be 1.2% on the upside and 0.9% on the downside.

The net result of the changes made to the fund’s asset mix was a 12% overall return for the portfolio in fiscal 2014 (to the end of March 2015), as reported, with Japanese and international equity exposures providing much of the excess return. It was the best result the fund had recorded since it was set up in 2001.

Mitani explained that with the new policy asset mix in place, “we are enhancing our internal controls and risk management structures, and we are developing human resources with expertise to further improve our investment capabilities.”

The new management is also working on a plan to introduce alternatives to a maximum 5% of the overall portfolio. Other innovations for GPIF include a move into smart-beta investing and the introduction of a performance-based fee structure for active managers, to replace its fixed-fee approach.

On September 16th, GPIF became a signatory to the United Nations' PRI as a demonstration of its commitment to environmental, social and governance (ESG) issues. In a statement the fund said, "It is our belief that considering ESG issues properly will lead to increases in corporate value, foster sustainable growth of the investee companies and enhance the medium to long-term for the pension recipients.

PRI signatories agree to incorporate ESG issues into their investment analysis and decision-making, seeking appropriate disclosure from investee companies and external managers. 

Encouraging its external fund managers to advance their activities for improving corporate value and signing up to the PRI, "is compatible with our philosophy that investment management of the public pension fund should be conducted safely and effectively for the benefit of the pension recipients from a long-term perspective," said the GPIF.