Activist Hired by GPIF as Japan Moves to Return Focus

In two years, Taiyo Pacific Partners LP went from being shunned by Japan’s investors to managing stocks for its largest pension fund. For the self-styled friendly activist, it shows the nation’s new focus on returns.

Local retirement funds are overcoming an aversion to vocal foreign investors because they need to try something to increase profits, said Taiyo Chief Executive Officer Brian Heywood, 47. The asset manager, which has $2.5 billion, was selected last month to oversee domestic equities by the 128.6 trillion yen ($1.27 trillion) Government Pension Investment Fund. Taiyo’s less-aggressive approach than other western activists is appealing in Japan, according to Heywood, who said he couldn’t comment specifically on GPIF.

Japan, where listed companies’ return on equity is half the global average, is revamping public pensions and pushing investors to demand more from the businesses they own. Prime Minister Shinzo Abe’s government is taking steps to move GPIF away from a focus on local bonds and introducing a code that asks asset managers to engage with firms.

“Until about a year and a half to two years ago, Japanese investors wouldn’t touch us, because there’s still this activist thing and they were very concerned about activists,” Heywood said in an interview in Tokyo on May 16. “There’s been this turn that happened where people would suddenly start considering us. Institutional investors here cannot meet their fiscal needs if all they’re doing is indexing the Topix.”

Topcon, Nifco

GPIF decided to give the firm money to manage because of its track record and non-hostile approach, according to minutes of the pension fund’s March investment-committee meeting. Heywood declined to give overall figures for Taiyo’s returns.

Taiyo typically holds stakes of less than 10 percent in listed companies for about five to 10 years, Heywood said. Investments include Topcon Corp., which makes measuring equipment and optical devices, and Nifco Inc., which develops fasteners. Nifco’s shares have gained 116 percent over the past 11 years, which Heywood said is the period Taiyo has held the company. The Topix rose 42 percent.

Taiyo said in October that it held a stake of more than 5 percent in non-bank lender J Trust Co., according to a statement on its website. Other investments include Horiba Ltd., which makes measuring equipment, and Nissha Printing Co., data compiled by Bloomberg show. J Trust dropped 29 percent this year through yesterday, Horiba slumped 13 percent and Nissha Printing lost 11 percent. The Topix slid 12 percent in the period.

White Blood-Cell

Taiyo only buys shares in companies that want to work with it to improve returns and doesn’t use proxy fights to force change, Heywood said.

“Japan is like a giant white blood-cell,” he said. “When there’s an invading organism, it moves against it. The whole system moves against it.”

While Japan Inc. mostly rejected the efforts of foreign activist funds such as Steel Partners and Harbinger Capital Partners LLC to influence company strategies, Abe’s government has been encouraging investors to adopt a milder version of the activist playbook, engaging with firms to increase their profitability.

Return on equity at Japanese companies in the 10 years through 2013 has been among the lowest of 24 developed markets tracked by Bloomberg. The Topix’s average was 6 percent, beating only Greece’s ASE Index, data compiled by Bloomberg show. Companies in the Standard & Poor’s 500 Index delivered 13.6 percent, while the Stoxx Europe 600 Index returned 13 percent and the MSCI World Index’s average ROE was 12.6 percent, the data show.

Pleasing Lenders

For Heywood, management at Japanese companies was focused on pleasing lender banks, which were also shareholders. Lenders didn’t care about profitability or cost of capital as long as loans were being repaid, he said. Change came as foreign ownership of Japanese companies surged and banks cut their stock holdings, he said.

The Tokyo bourse launched the JPX-Nikkei Index 400 in January. The gauge, a brainchild of planners at the ruling Liberal Democratic Party, selects members based on ROE in an attempt to shame chief executive officers into boosting returns. A second goal was to prod GPIF into buying more local stocks. GPIF adopted JPX-Nikkei 400 as a benchmark last month, cutting passive investments in the Topix to make room.

Stewardship Code

The financial regulator completed a stewardship code in February based on equivalent principles in the U.K. Asset managers that choose to sign up are expected to engage with companies or explain why they didn’t. The Japanese version removes a reference to “escalating” stewardship activities in favor of softer language.

Minutes from GPIF’s March investment-committee meeting suggested panel members were concerned about a public backlash to hiring an overseas activist. GPIF should stress to media that Taiyo talks with companies and provides consulting for them, one panel member said.

Taiyo’s activism includes everything from helping firms with strategic decisions to training CEOs and other executives and giving them advice on understanding foreign investors, Heywood said.

California Public Employees’ Retirement System, or Calpers, was Taiyo’s first investor, Heywood said. Billionaire investor Wilbur Ross also put money in the fund at the start, Heywood told Bloomberg news in 2004.

Calpers Investment

“You have Calpers in the U.S., which is a massive pension fund and has used its pension power to try to move that market,” Heywood said last week. “That’s somewhat of a model for some in Japan. They say let’s not be passive here, let’s invest in managers who will go and actively engage with their portfolio to try get better returns.”

Heywood, a Harvard University graduate who first lived in Japan in the 1980s as a missionary, said he has no zeal to change the country.

“I don’t want to break down the walls in Japan,” he said. “I need companies to trust that what Taiyo says will make them a better company in the long term. I believe that in doing that I’m going to make money.”

(Updates with fund investor details from fourth-last paragraph.)
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