The Giant of Tokyo’s Stock Market Reveals Its Investment Secrets

Tokyo Whale Reveals Investment Secrets
  • Japan pension fund is top owner of MUFG, Honda, many more
  • First unveiling of equity holdings spurs debate on strategy

Companies across Japan have a new name in their top 10 shareholder lists: the world’s largest pension fund.

The $1.3 trillion Government Pension Investment Fund is the top owner of Mitsubishi UFJ Financial Group Inc., Honda Motor Co. and at least 119 other Tokyo-listed firms, according to Bloomberg analysis after GPIF unveiled its individual investments for the first time last month. It’s the second-biggest holder in Toyota Motor Corp. with a 5.5 percent stake in Japan’s largest company. At the latest reckoning, the retirement savings manager owns about 5.8 percent of the stock market.

“Its scale and presence is huge,” said Yoshinori Shigemi, a global market strategist in Tokyo at JPMorgan Asset Management Ltd. “Now that it has finished its big shift to equities, it can start being more selective about which companies it buys.”

QuickTake Japan's Pension War

The figures show GPIF’s increased influence after it doubled its target for Japanese stocks in a 2014 strategy overhaul. They also drive home the breadth of its ownership -- the fund is a top 10 shareholder in about 99 percent of Japan’s biggest companies -- raising questions about whether GPIF should be less passive in its investments.

Taken together with the stock buying of the other Tokyo whale, the Bank of Japan, the holdings show the growing power of state investors in the nation’s market. With the central bank on course to become the No. 1 shareholder in 55 Nikkei 225 Stock Average companies by the end of 2017, it’s hardly surprising that Japanese stocks rose last year without net buying by foreigners for the first time in a quarter century.

Click here for a story on BOJ stock purchases: The Tokyo Whale’s Unstoppable Rise to Shareholder No. 1 in Japan

GPIF held 2,037 Japanese stocks at the end of March 2015 through its external fund managers, according to figures released last month. It makes the top 10 list in all but seven companies in the Topix 500 Index of the nation’s largest firms, calculated based on outstanding shares this month and assuming the fund’s investments haven’t changed. It’s a natural consequence of a strategy where more than 80 percent of its Japanese stock investments are passive, tracking the benchmark Topix index and others.

The Topix fell 0.5 percent at the close in Tokyo, extending its decline this year to 16 percent. The drop follows a 9.9 percent gain for 2015.

For Ken Peng, an Asian investment strategist at Citi Private Bank in Hong Kong, the fund should move away from its buy-anything approach and push Japan Inc. for higher returns.

For a QuickTake on Japan’s pension fund, click here.

“GPIF have a lot more potential to use their weight,” said Peng. “There are political hurdles to GPIF being an active investor but, I think, they can exert influence in many ways anyway.”

Under Prime Minister Shinzo Abe, Japan has already dabbled in the use of state incentives to encourage change at companies. A stock index introduced in 2014 picks only firms with strong equity returns, hoping to shame others into improving performance. The Bank of Japan buys certain exchange-traded funds tracking only companies that invest their cash hoards in their businesses or staff.

That doesn’t mean the pension fund can easily change. Plans to allow GPIF to pick stocks in-house -- rather than outsourcing investments to asset managers -- were nixed by the fund’s overseers in February, after the business lobby expressed concern about state meddling in the private sector. On the day the fund announced its individual investments, President Norihiro Takahashi tried to alleviate those fears by saying GPIF had no intention to influence specific shares.

Limited Tolerance

“The interesting question is whether we’re going to see a significant shift in the passive allocation,” said Jonathan Allum, a strategist at SMBC Nikko Capital Markets Ltd. in London. “I suspect there will be limited political tolerance for taking on more risk than what the current equity weighting already gives you. If you were to go more active, then you’d further increase the risk and volatility, and I don’t know if there’s appetite for that.”

GPIF’s disclosures show it has been making changes. Passive Japan stock investments fell to 82 percent of the total at the end of March, compared with 87 percent a year earlier. The fund’s reach spreads beyond the benchmark gauge, and includes smaller stakes in companies such as Sosei Group Corp., Cyberdyne Inc. and Mixi Inc.

Stock picking hasn’t paid off for GPIF, either. Actively managed domestic holdings underperformed passive strategies by 0.3 percentage points in the past decade, something officials are trying to rectify by replacing managers sooner when they do badly.


The fund has also been boosting its allocation to smart beta, a kind of middle ground between passive and active strategies that tweaks indexes to achieve better returns. About 10 percent of Japan stock holdings tracked smart-beta gauges at the end of March, almost twice the level a year earlier.

It’s doing more to guide the companies it owns, even if it can’t pick stocks directly. GPIF signed up to a code designed to get traditionally silent investors to press executives of firms they own to improve profitability.

Even the disclosure of stock holdings itself is a step forward in modernizing the fund’s approach. Others, such as Norway’s Government Pension Fund Global, have been doing this for years. Now, as investors wait for the next update on GPIF’s performance, which comes on Friday, Sumitomo Mitsui Trust Bank Ltd. says there’s room for improvement in how it invests in stocks.

“Given the huge size of the fund, it’s difficult for GPIF to be too active in the market and trade a lot without impacting share prices and making stocks volatile,” said Ayako Sera, a market strategist at the money manager. “But they should increase the strategies they have within equities, like by investing in different sectors or using more smart-beta. There’s no right answer, but they need to find new ways.”

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