The world’s biggest pension fund signaled a willingness to cap direct holdings at 3 percent of a company’s stock as it seeks freedom to invest in equities itself rather than hiring asset managers.

QuickTake Japan’s Pension War

Japan’s $1.2 trillion Government Pension Investment Fund currently tells external fund managers to hold less than 5 percent of a company, Hiromichi Mizuno, chief investment officer for the fund, said at a health ministry pension panel on Tuesday. Should GPIF begin direct investments in stocks, a 3 percent limit on holdings of each company should be considered, Mizuno said, without explaining why.

The fund has undergone unprecedented changes since 2013, paring its bond allocation to make way for more equities and a foray into alternative investments. GPIF’s overseers at Japan’s health ministry now want to improve the fund’s governance by creating a board of directors, and are debating whether laws should be changed to allow the fund to invest in stocks directly.

“I’m frequently meeting the CIOs of global pension funds, and when I tell them that most of our investments are outsourced and that only some passive domestic bond investments are in-house, they look amazed, and I’m sick of seeing it,” Mizuno said. “From a global standpoint, GPIF’s investment is behind the curve.”

The government panel is likely to meet about three more times to discuss changes to the law determining what GPIF assets can buy directly. The fund’s own staff managed 867.3 billion yen ($7.4 billion) of active domestic bond investments and 31.4 trillion yen in passive Japanese debt holdings at the end of March.

Debate, Law

When the panel met earlier this month, the health ministry proposed establishing a 10-person committee as it moves closer to completing the long-awaited governance revamp. If the panel agree GPIF should begin in-house stock investments, the health ministry will draft a bill along with the governance proposal and submit it to the Diet, which runs through mid-June.

By investing directly in equities, GPIF would gain access to more market information and reduce the fees it pays external managers, according to Mizuno. Under the current law, the fund is also unable to invest in derivatives to hedge investments, and this should also be reviewed, he said.

GPIF’s average annual payout in fees to domestic stock managers over the past three years was about 6 billion yen, it said.

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