The man who helped name the world’s biggest pension pool is back as one of its money managers, and says the fund’s new approach to buying stocks will rub off on other retirement investors.
Under pressure to achieve higher returns, the 126.6 trillion yen ($1.2 trillion) Government Pension Investment Fund changed how it buys Japanese shares in April, adding more foreign and lesser-known firms as external managers. It chose U.S.-based Dimensional Fund Advisors LP as one of three companies for smart-beta strategies, broad investment using weightings other than market value.
The equity revamp “shows how much GPIF has evolved,” John Alkire, Dimensional’s Japan head, said in an interview in Tokyo on July 8. His company oversaw $378 billion as of June 30. “GPIF tends to be the bell cow. The sweeping change occurring at the fund is almost like a wake-up call for corporate pensions. They’re thinking that there’s maybe more risk in not owning Japanese equities.”
A panel handpicked by Prime Minister Shinzo Abe last year urged GPIF and other public pension funds to reduce their reliance on domestic bonds, diversify into riskier assets and reduce use of the Topix index for stock investment. GPIF held 16 percent of its assets in local shares at the end of March and is expected to boost that to 20 percent when it reviews holdings in coming months, according to a Bloomberg News survey of 10 fund managers, strategists and economists in May.
GPIF picked 14 active and 10 passive Japan equities managers in April, with most of the active ones coming from overseas, and even hired an activist fund, Taiyo Pacific Partners LP.
Dimensional, Goldman Sachs Asset Management LP and Nomura Asset Management Co. oversaw about $10 billion for GPIF in smart-beta investments as of March 31. GPIF also had about $1.5 billion with three passive managers tracking the JPX-Nikkei Index 400, a government-backed gauge started this year to shame chief executives into boosting returns.
“It’s a second revolution at the fund,” said Alkire, 58, who worked at Morgan Stanley’s asset management unit when the predecessor to GPIF announced it as an active external manager in 1996. “The first was the ability to hire asset managers. And the second was the broad sweeping change to their investment manager profiles.”
Smart-beta funds build their own indexes or change existing ones, trying to boost returns by ranking companies not by market capitalization, but by measures such as volatility and dividend payments.
Dimensional “can present a strong argument for being the originator of smart beta, which we call factor investing,” Alkire said. The fund was established in 1981 and designs its portfolios based on research by Chicago-school academics like Eugene Fama.
Dimensional believes markets are efficient and hard to beat by traditional stock picking, according to Alkire. Excess returns can be found by building broad portfolios of smaller stocks, companies with lower valuations and those with higher profitability, which tend to perform better over time, he said.
Dimensional buys small-cap stocks for GPIF with the MSCI Japan Small Cap Index, with 860 members, as its benchmark. Dimensional invests in about 1,000 companies, according to portfolio manager Kotaro Hama. The measure gained 5.1 percent this year through yesterday. The TSE Mothers Index of small-cap stocks declined 6.9 percent in 2014, while the broader Topix fell 2.2 percent.
The DFA Japanese Small Company Portfolio (DFJSX) returned 7.3 percent this year through yesterday, beating 85 percent of its peers, according to data compiled by Bloomberg.
Dimensional managed 76.9 billion yen in Japanese stocks and 33.2 billion yen in international equities for GPIF as of March 31, according to the fund’s investment results on July 4.
Alkire was born and raised in Kobe after his grandparents came to Japan as political refugees during the Russian Revolution of 1917. He began his career at Morgan Stanley in 1981, helped establish the firm’s asset-management unit in Tokyo in 1993 and later ran it for 18 years. He joined Dimensional in 2012, about a year after retiring from Morgan Stanley. Dimensional has a team of 10 in Tokyo, many from Alkire’s former firm.
During his time at Morgan Stanley, Alkire said the president of the public pension fund came to him for advice on what to name the fund in English.
What It Is
“I said call it what it is -- the government pension investment fund,” Alkire said.
As GPIF moves to buy more shares, other public pensions with about 50 trillion yen in assets are set to do the same. Retirement funds for civil servants, firefighters, the police and schoolteachers will align their assets with GPIF by October 2015. They’re even more reliant on domestic bonds than GPIF, which aims to have 60 percent of its holdings in such debt.
Dimensional has been hired by another big public fund since its GPIF appointment was announced, Alkire said, declining to give more details.
Corporate retirement funds will also be drawn back to shares, he said. Such funds almost halved domestic stock holdings in the past four years, according to a survey of 144 of them by JPMorgan Asset Management (Japan) Ltd. from March to June. Japanese equities accounted for about 11 percent of their assets at the end of March, down from 21 percent four years earlier, the report showed, and alternative assets increased to 11 percent from 7.6 percent.
“The fact that GPIF is increasing its risk profile” will make public and corporate retirement funds follow in its footsteps, Alkire said. “It’s sort of a food chain that seems to be reallocating to Japanese equities after a long period of not allocating or reducing.”
JPMorgan Asset isn’t so sure. Corporate pensions don’t believe Abe’s plans to revive Japan will succeed, according to Akira Kunikyo, a global market strategist at the investment manager. Norio Suzuki, its head of institutional sales and marketing in Tokyo, said it’s hard for them to take on more risk as they want to avoid damaging the companies behind them.
Boosting returns while managing risk is one reason GPIF turned to Alkire in his new role at Dimensional. Research commissioned by GPIF found smart beta increases returns while lowering risk over the long term, the fund said last month.
“It’s more luck than skill to pick a winning stock,” Alkire said. “It makes sense to hold more securities, mitigate the risk of betting on one or two companies, and try to get one or two basis points a day.”
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