GPIF Adds JPX-Nikkei 400, Smart-Beta Managers in Equities Revamp

Apr 04, 2014 3:41 am ET

April 4 (Bloomberg) -- The world’s largest pension fund overhauled its Japanese stock strategy, adding new managers and investment styles.

The 128.6 trillion yen ($1.24 trillion) Government Pension Investment Fund will reduce passive investments based on the Topix index and add the JPX-Nikkei 400 Index among new benchmarks, the fund said today in a statement. Traditional active investments will be trimmed to make room for smart-beta strategies, according to GPIF. The JPX-Nikkei 400, a stock gauge that is the brainchild of the ruling Liberal Democratic Party, started in January.

“GPIF is changing in several ways, or at least I sense their will to change,” said Kazuyuki Terao, Tokyo-based chief investment officer at Allianz Global Investors Japan Co. “JPX- Nikkei 400 is designed to encourage investment in stocks with high return on equity, which aims to change corporate governance using the power of the market. Plus, they’re trying to boost returns.”

The strategy changes come amid pressure on GPIF, which has more than half its assets in Japanese bonds, to achieve higher returns to cover pension payouts for an aging population. A panel handpicked by Prime Minister Shinzo Abe last year recommended that the fund move beyond passive stock investments using the Topix as a benchmark.

GPIF selected 14 active and 10 passive investment managers, eight of which had existing mandates from the fund, according to today’s statement. It also said it will make passive and active investments in Japanese real-estate investment trusts. The fund will introduce a performance-based fee structure for active managers, it said.

Smart Beta

Smart beta occupies a middle ground between passive funds active management. Designers of the benchmarks used in the strategy build their own indexes or change existing ones, trying to boost returns by ranking companies not by price, but by measures such as volatility and dividend payments.

GPIF’s three smart-beta managers will include Goldman Sachs Asset Management Co., according to today’s announcement.

Goldman Sachs Asset’s benchmark is the S&P GIVI Japan index, which weights stocks based on their “intrinsic value” calculated by assessing the value of each company’s assets and their forecast earnings growth, according to the website of S&P Dow Jones Indices LLC, which created the gauge.

GPIF said it named Diam Co., Sumitomo Mitsui Trust Bank Ltd. and Mitsubishi UFJ Trust & Banking Corp. to oversee passive JPX-Nikkei 400 investments, with BlackRock Japan Co. using the MSCI Japan Index and Mizuho Trust & Banking Co. investing based on the Russell Nomura Prime Index.

“All shares were generally bought together in the past, but that’s going to change, with some being chosen and others not,” Allianz’s Terao said. “The government is trying to use that to improve corporate governance and profitability. I hope that’ll help improve Japan’s financial markets.”