Japan’s GPIF and the next 100 years

The $1.3 trillion Government Pension Investment Fund of Japan has a 100-year timeframe but that doesn’t mean all of its assets are long term.

“We are happy for active managers to trade on a short-term cycle, and passive managers to focus on sustainability over the long term of the company,” executive managing director and chief investment officer, Hiromichi Mizuno says.

“You can’t force all investors to have the same horizon. If as a whole it works, I am happy. I agree the sum of investors as a whole have a long term perspective, but you can’t dictate that all investors behave the same way.”

The GPIF is managed externally and around 20 per cent of the portfolio is managed by active managers and 80 per cent passive.

“The direction we are trying to make clear is that active and passive managers can have different roles and different time horizons,” Mizuno says.

“We are encouraging passive managers to engage with companies with a long time horizon in mind. On the other hand, if active managers say they think three months is the best timeframe to produce alpha then I won’t discourage it. The mismatch might be difficult to manage but we are trying to make the rules as clear as possible.”

This month the GPIF established a new division in its public market investment department, called “stewardship and ESG”.

Its investment principles outline that the fund will continue to maximise medium- to long-term equity investment returns for the benefit of pension beneficiaries by fulfilling stewardship responsibilities. And it believes that it is appropriate and essential for GPIF as a pension fund to increase long-term investment returns for pension beneficiaries by fostering sustainable growth and worth of companies in which it invests.

The fund accepted Japan’s Stewardship Code in May 2014 and became a signatory of PRI (principles for responsible investment) in September 2015.

Mizuno’s comments were made as part of a panel discussion at the PRI in Person conference in Singapore last month. Mizuno is a member of PRI asset owner advisory committee.

Commenting on climate risk and fiduciary duty, he said that “I don’t see a point in beneficiaries getting a full pension but they can’t step outside”.

The fund is looking at how to interpret this into daily investment activities, including looking at a proposal for environmental, social and governance (ESG) indices.

“Climate change is a long-term issue but we need to take it into our daily investment practice, ESG indices/positive screen companies is one way to do that.”

Bold proposition

To overcome the problems associated with short term reporting, Mizuno made a bold proposition to the audience.

“I propose that every asset owner only reports 50-year rolling performance number,” he said.

The session, which was chaired by the chair of PRI, Martin Skancke, also heard about the challenges of reporting long-term numbers.

Paul Smith, chief executive of the CFA Institute, says keeping focused on the long term is hard.

“With a 100-year time horizon you’re not around to reap the benefit, so behaviourally it is difficult, but also hard from a metric point of view. Also difficult where there’s a trust issue in the industry, hard to conduct long term investing in that environment,” he says.

Scancke says the Norwegian Sovereign Wealth Fund’s working definition of long-term is the capacity to hold an asset and not be forced to sell it; the ability to be contrarian and can sell or buy and rebalance when others aren’t.

Smith says the problem the industry is trying to resolve is that ESG issues, especially the environment, require a long-term focus.

“As the joke runs, the long-term is a series of short-term events, not as simple as saying the long-term is good and the short-term is bad, but about needs; finance industry structure needs to change to fit those needs,” he says.

“If we believe those challenges exist, then how do we enable that to happen?”

Chief finance and chief risk officer of APG, Angelien Kemna, says that APG and PPGM have collaborated on metrics to measure sustainability impact and keep returns focused first.