Fidelity Says GPIF Key as $860 Billion Backs Japan Code

While broad support from money managers is nice, the backing of Japan’s biggest pension fund for new investor guidelines is the reason they will succeed, according to Fidelity Worldwide Investment.

Almost 130 institutions have adopted the country’s stewardship code, the Financial Services Agency said on June 10. They are estimated to own more than $860 billion in Japanese stocks, about one-fifth of all shares. For Hiroki Sampei, director of research at Fidelity Worldwide Investment in Tokyo, the Government Pension Investment Fund’s enthusiasm bodes even better for the principles’ success. GPIF, with 22.1 trillion yen ($217 billion) in local equities, signed up for the code in May.

“It’s not about the numbers, it’s about whether the key players properly engage with companies,” Sampei said in an interview in Tokyo on June 12. GPIF’s support “will have a big impact,” he said.

Prime Minister Shinzo Abe is pushing investors to demand higher returns and better use of capital at Japan’s cash-hoarding companies as the nation exits 15 years of deflation. The stewardship code completed in February enlists asset managers, some of which traditionally took a hands-off investing approach, to engage more with firms and suggest ways to improve.

As GPIF is prohibited from buying stocks directly, the principles will apply to its external managers of Japanese shares. Those include Fidelity Worldwide Investment, which has signed up for the code independently.

Increasing Returns

“Fulfilling our stewardship responsibilities will contribute to the value and sustainable growth of companies and play a role in increasing our investment returns over the medium to long term,” GPIF spokesman Tomoyuki Hirao said by phone on June 12. “This will benefit people covered by the pension program.”

Institutions will be hired and existing ones evaluated based partly on their adherence to the code, the world’s biggest pension fund said. GPIF will meet with the managers to find out how they are fulfilling their duties as responsible investors.

“GPIF’s stewardship policy is really good,” Sampei said, noting that it will influence other pension managers to follow suit. “It will be one key to the code’s success.”

The stewardship guidelines and GPIF’s focus on improving accountability are both part of Abe’s efforts to make more aggressive use of Japan’s wealth to foster a sustained economic recovery. Other initiatives include tougher corporate governance standards and the creation of a stock index to direct investors toward companies with high return on equity.

Own Money

Japanese companies have tended to see money provided by investors as their own, according to Sampei. Asset managers such as insurers have held shares to cement relationships with companies to which they sell products, so have been reluctant to press firms to improve, he said.

On June 10, the FSA, which created the program, published a list of 127 institutions that signed up. They include six trust banks, 86 asset managers, 12 pension funds, 19 insurance companies and four service providers. Goldman Sachs Group Inc. estimates that they hold about 88 trillion yen in Japanese shares. That’s about 19 percent of the market, according to data compiled by Bloomberg.

“We believe this new code will begin to force domestic investors who have belonged to the ‘silent majority’ to start engaging with company managements,” Goldman Sachs strategists led by Kathy Matsui wrote in a note last week.

Topix Moves

Japan’s Topix index rose 0.3 percent today to 1,238.20 at the close in Tokyo. The measure slid 4.9 percent this year.

Sampei said the stewardship program will be effective even though it isn’t legally binding, as managers will have to explain their activities to their investors. Still, he also said he was surprised at the number of managers that adopted it and cited a herd mentality as part of the reason.

“Some 127 investors signed up in Japan, compared with 70 that adopted the U.K. code in its first year,” Sampei said. “That’s a pretty overwhelming number. This, in a way, is a bad point of Japanese people. If those beside them put up their hands, they tend to copy them and do the same. When I saw the numbers, I did question whether all will be able to do this properly.”

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