Anyone who doubts the frequent lack of professionalism in the Japanese asset management industry need look no further for proof than the experience of the government-run University Endowment Fund.
The 10 trillion yen (US$70 billion) fund was established in 2022 with the aim of providing financial subsidies to Japanese universities to enable them to excel among global peers. Run by the education ministry’s Japan Science and Technology Agency (JST), the fund suffered a 60 billion yen loss in the 12 months to March 31, 2023, its first full year of operations. Its return was minus 0.6%. This was a period when the Tokyo stock market was beginning to climb back toward 30-year highs, but when the fund was invested heavily in bonds rather than stocks.
“Only in Japan can you have the biggest bull market in a generation but public money managers making negative returns,” veteran Japan financial analyst Jesper Koll tells Asia Asset Management.
He didn’t mince his words, calling it a case of “incompetence and bad governance managed by government stooges, not professionals”.
He was referring to the fact that a majority of fund managers are drawn from the ranks of domestic financial institutions such as state pension funds or other government bodies, and the lack of a competitive culture in securing the best returns on behalf of clients. They are not performance-oriented.
Koll’s comments are unusually frank in a country where fund managers and officials are generally reticent about criticising their peers. But Prime Minister Fumio Kishida has acknowledged the shortcomings of the industry and vowed to introduce greater professionalism.
He is aiming to achieve this by introducing more foreign fund management expertise into Tokyo and other Japanese financial centres with the aid primarily of FinCity.Tokyo, a public and private sector promotion agency, and of the Tokyo Metropolitan Government.
Subsidies
The University Endowment Fund’s performance underscores the need for such reforms.
Although its equity portfolio saw a return of 65.5 billion yen and its alternative investments produced a modest return, bond losses totalled 126.3 billion yen due to rising interest rates worldwide, according to the Nikkei news agency.
As of end-March 2023, 55% of the fund’s assets under management were in global bonds, including from Japan, while 17% were in global equities, the news agency said. The ratio of high-risk alternative assets was kept low in order to prioritise a stable financial base during the first year of operations.
The fund’s net income, including stock dividends and fixed gains and losses, totalled 74.2 billion yen. At the same time, unrealised losses amounted to 125.9 billion yen.
Subsidies are allocated based on the fund’s financial situation and current profit and loss figures, and “since subsidies are provided within the scope of investment returns, it will be difficult to provide them if results are not achieved”, an education ministry official was quoted as saying in the Nikkei report.
The fund received applications for subsidies from ten establishments, with the University of Tokyo, Kyoto University and Tohoku University selected as finalists. One or two of these will be chosen to receive subsidies in the autumn.
The fund has an annual investment target of 4.49%. It’s aiming for 300 billion yen in returns by March 2027. This is in addition to setting aside up to 600 billion yen for a rainy day fund, which would allow two years of funding if the market deteriorates.
According to the JST, the 4%-plus investment target does not apply while the basic portfolio is being created in order to avoid hindering long-term funding to universities, as the fund’s capital adequacy ratio is low due to its reliance on long-term, low interest rate government loans.
