Tokyo's $50 Billion Stock Picker Struggles to Beat the MarketBy and
GPIF’s active bets on Japan shares lagging behind Topix index
Still, fund expected to post record earnings on Trump rally
As speculation mounts that the world’s biggest pension fund will post the best quarterly performance in its history, there’s one area where the money manager is probably falling short: its $50 billion Japanese stock-picking portfolio.
Thanks to a rally in the broader market and the weaker yen after Donald Trump’s election, Japan’s $1.2 trillion Government Pension Investment Fund is likely to report an investment gain of about $88 billion for the three months through December on Friday, the Nikkei newspaper said this week without noting where it got the information. But analysis by Bloomberg of the fund’s actively managed domestic shares suggests that, in most categories, they’re struggling to beat the market.
The underperformance highlights the challenges GPIF faces as it seeks higher returns to fund the nation’s burgeoning retirement payouts. It also puts the pension fund at the heart of a debate about whether active stock selection can do better than tracking indexes over time. Still, the impact on the fund’s broader performance is limited, because the vast majority of GPIF’s stock investments are passive.
“The odds are slightly against you,” Jonathan Allum, a strategist at SMBC Nikko Capital Markets Ltd. in London, said of stock-picking, noting the higher management costs compared with passive investing. “The question GPIF has to face is, if it does want to increase returns by taking on risk, it may actually decrease returns.”
Multiple strategies exist for deducing GPIF’s active stock bets. One is to look at companies where the value of shares owned by the fund is much higher than it would be if GPIF just tracked the four indexes it uses for passive investments -- a method that highlights the larger companies that GPIF’s active managers favored.
Another is to find firms where the stock held by GPIF makes up a far greater proportion of the fund’s Japan equity portfolio than it would do if the fund just invested passively. That approach, which disregards company size, yields a list that also includes smaller shares.
Bloomberg analyzed GPIF’s Japanese equity holdings as of March 31, 2016, which the fund reported in November. It compared the value of the fund’s stake in each company and its weighting in its portfolio to what they would be if GPIF only owned them passively through the indexes it tracks. It isolated three categories of active investments:
- the 30 biggest picks by additional market value held (big stock picks)
- the 30 largest picks by additional proportion held (stocks of any size)
- the 102 companies owned by GPIF that aren’t included in any index that the fund uses for passive investments (small stock picks)
Assuming that the holdings haven’t changed, the first two categories underperformed the Topix index for the period from April 1 through the end of February. The big stock picks added 13 percent, while those of any size gained 12 percent. That compares with a 14 percent advance by the Topix.
By additional market value of its holdings, GPIF’s top selections were Toyota Motor Corp., Nippon Telegraph & Telephone Corp. and Honda Motor Co., according to Bloomberg’s analysis. Measured by the increase in the proportion of the portfolio, they were Septeni Holdings Co., Nakanishi Inc., and Iriso Electronics Co. And of the 102 smaller stocks, the largest were ITmedia Inc., Giken Ltd. and UT Group Co.
GPIF had just 18 percent of its 30.6 trillion yen ($268.3 billion) in Japanese stocks in active strategies at the end of March. Because the fund can’t invest directly in shares, its active holdings are overseen by external managers, including Nomura Asset Management Co., Goldman Sachs Asset Management Co. and JP Morgan Asset Management Inc. More than a third of domestic active investments were with companies that chose stocks from the Topix, while more than half were in smart-beta strategies. The top 10 blue-chip picks in Bloomberg’s analysis made up almost a fifth of actively managed holdings.
“GPIF’s main field is passive investing,” said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “If it wants to target something extra through active investing, it won’t achieve it by going for the same group of companies.”
In fact, the fund’s smaller picks -- firms that weren’t listed on any of the indexes that GPIF uses for passive investments -- are the one area where returns are better. The 102 stocks, which have an average market capitalization of slightly less than $400 million, posted a return of 16 percent over the period. That trounces the 3.8 percent gain by the Mothers Index of smaller shares. Still, their performance has little impact, because the holdings account for much less than 1 percent of GPIF’s active investments.
Of course, some stocks did particularly well. Security-systems provider DDS Inc., car-parts maker H-One Co. and Nittoku Engineering Co., which develops coil-winding machines, all more than doubled since April. But that’s not too surprising, given the fund held stakes in 2,120 companies (including real estate investment trusts) at the end of March, which is roughly 55 percent of all firms listed in the country.
And while $50 billion is a lot of money, it was still less than a fifth of GPIF’s Japan stock holdings at the time. More broadly, it was just 4.2 percent of the fund’s assets. So even if active investments are underperforming, it doesn’t matter much if the broader market is surging. The Topix jumped 15 percent in the three months through December, its biggest quarterly gain since 2013.
Not only that, it’s still less than 2 1/2 years since GPIF overhauled its portfolio by deciding to put half its money in stocks. For Amundi Japan Ltd., it’s too early to pass judgment on the fund’s investing skills.
GPIF’s strategy “won’t bear fruit anytime soon,” said Akio Yoshino, the chief economist at the money manager in Tokyo. “You have to take a longer-term perspective.”
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