Japan’s $97b University Fund plan draws criticism

Japan is planning to launch one of the world's largest endowment funds in 2022 to support scientific research and development among the country’s leading academic institutions. But investment experts are sceptical that the planned fund can deliver sufficient investment returns, given likely limitations in its ability to invest into risky assets. 

The endowment, which is provisionally called the University Fund, is set to broadly copy the investment portfolio of Government Pension Investment Fund (GPIF) in Japan, according to a document released by the Ministry of Finance (MOF). The world's largest pension fund allocates almost all of its assets into domestic and overseas bonds and equities and invests most of it passively, via external asset managers.

The goal of the endowment is to improve the capabilities of top universities such as Tokyo University and Kyoto University by using the fund’s proceeds to purchase advanced experimental equipment, digitalised data, and support the education of young researchers.

The government has targeted an eventual fund size of ¥10 trillion ($96.7 billion). If achieved at that size, the University Fund could become the largest endowment in the world – albeit representing multiple universities. In comparison, Harvard University has the US’s largest endowment, with about $40 billion in assets under management.  

The MOF intends to seed half of the funds for the planned endowment, according to the document. However, ¥4.5 trillion of this will comprise of a loan from the ministry’s fiscal investment and loan programme (FILP); it will only supply ¥500 billion in capital. Plans have yet to be finalised on how the other ¥5 trillion would be supplied, but it appears likely that universities would be expected to contribute funds at a later stage.

The MOF expects the fund to earn 3% to 4% on average, equivalent to an annual ¥300 billion to ¥400 billion per year once it achieves its anticipated size. That appears to be a relatively ambitious goal; GPIF’s average annual return has been 3.09% since 2001, according to the pension fund's latest quarterly results. 

Investment experts who are familiar with the government plan for the University Fund say the Japan Science and Technology Agency (JST), which is tasked with promoting technological developments in the country, will be its likely manager. JST already has funding programmes for strategic research projects.

According to initial discussions, the endowment is planned to start investing in 2022 and will have a lifespan of 50 years. It is required to pay back the FILP loan with interest between 2041 and 2061.

The University Fund is the first of its kind for Japan, though some of the country's universities have attempted to invest in securities before. Most have suffered losses as a result of equity price fluctuations or poor returns on bond schemes over the last 30 years, Katsuyuki Tokushima, head of pension research at NLI Research Institute, told AsianInvestor.

SUFFICIENT RETURN?

The MOF’s endowment plan may be bold, but it could struggle to succeed.

Investment experts told AsianInvestor the fund, partially financed by debt, would face challenges to achieve its targeted annual return range, given the low interest rate environment and the relatively low amount of investment risk that it appears willing to take.

The backing of government finance is likely to limit the investment products available to the fund to safe assets, such as government bonds. However, returns on these investments are very low in today’s interest rate environment; 10-year Japanese Government Bonds yielded 0.04% on Thursday (January 21), equivalent US Treasuries offered 1.08% and German Bunds -0.53%.

It will be very hard to ensure a 3% to 4% return in the low interest rate environment, an analyst at consultancy Cerulli Associates told AsianInvestor.

"Can they really copy what GPIF has been doing?... Can they really take higher risks, or take a sophisticated investment approach to make returns in this low interest rate environment, which is likely going to continue in the coming period given continuing stagnation?" Shigeto Nagai, head of Japan economics at Oxford Economics, told AsianInvestor.

In addition, it is hard to launch a new fund in this current environment. While GPIF is cautious about risks, it has the benefit of economies of scale, many years of investing experience and established external partner relationships. This new fund plans lacks those strengths, and yet wants to attain similar target return while taking little risk.

Nagai is not convinced that the endowment can find a suitable trade-off between investment risk and return, under the stipulated plan.

“There are lots of concerns about whether they can really make money or if they make losses, who is going to take responsibility for that? The government [could potentially] lose that ¥0.5 trillion [initial investment] and also this additional ¥4 trillion in loan from the government will be burned,” he added.

Moreover, market experts are not sure whether JST is a sufficiently capable manager of the fund. The agency would need to identify and hire top-level executives if it is to internally meet the targeted investment returns but paying high remuneration to specific civil servants is not politically acceptable, the Cerulli Associates analyst said.

Instead, it is likely that JST will appoint external managers to invest specific amounts, just as GPIF does. But managing external managers also requires expertise that it may not possess, he added.