GPIF publishes guidelines for Japanese public funds

28 November 2013   Category: News, Asia, Japan   By Maya Ando

Japan’s Government Pension Investment Fund (GPIF) has published guidelines to improve the management of public and quasi-public funds in November. Such funds currently hold more than 200 trillion yen (US$1.96 trillion) in financial assets.

The panel overseeing the guidelines, the Panel for Sophisticating the Management of Public/Quasi-public Funds, was established under the ministry in charge of economic revitalisation as part of the current ‘Japan Revitalisation Strategy’ (set out by the Cabinet on June 14), formulated as part of the growth strategy for stimulating private investment (the so-called ‘third arrow’ of Abenomics).

While public and quasi-public funds have already undergone a series of recent reforms, a comprehensive and cross-cutting review on their investment management capabilities has never been made.

Highlights of the recommendations are as follows:

Portfolios: The current heavy weighting toward domestic bonds needs to be revised to improve returns and hold down interest rate risks, as the Japanese economy is shifting from deflation to a mild inflationary environment. Meanwhile, funds should consider investing in new asset classes, including REITs, real estate, infrastructure, venture capitals, private equities and commodities. Raising the foreign-assets ratio of a portfolio is noted as an effective way to diversify investments. Consideration should also be made, it says, to increasing the ratio of active investments, depending on the size and characteristics of each fund. Actively managed domestic equities comprise about 20% of the GPIF’s total portfolios. 

Investment costs: High brokerage and transaction fees negatively impact the development of the financial and capital markets. While more sophisticated investment strategies may lead to a rise in brokerage fees and other costs, funds must keep net returns in line with rising costs.

Benchmarks of passive investments: Despite the popularity of tracking the TOPIX index, funds are advised to consider tolerating some deviation from the index or using other indexes that enable greater investing efficiency (including, for example, the use of a new stock index that has been jointly developed by the Japan Exchange Group and Nikkei Inc., due to be introduced at the beginning of 2014 (the JPX-Nikkei 400). The index takes into account additional factors such as return on equity).

Governance structure: Governance structures should allow funds to fully demonstrate independence and creativity, says the report. Expert employees are required to diversify investments and enhance risk management, and stakeholder participation in investment management should reflect the views of employers and employees who pay pension premiums to public pension funds.