Wednesday, January 13, 2016

GPIF's CIO Sick of Outsourcing Investments?

Anna Kitanaka and Shigeki Nozawa of Bloomberg report, Japan's GPIF Debates 3% Stock Cap in Push for In-House Investing (h/t: Pension360):
The world’s biggest pension fund signaled a willingness to cap direct holdings at 3 percent of a company’s stock as it seeks freedom to invest in equities itself rather than hiring asset managers.

Japan’s $1.2 trillion Government Pension Investment Fund currently tells external fund managers to hold less than 5 percent of a company, Hiromichi Mizuno, chief investment officer for the fund, said at a health ministry pension panel on Tuesday. Should GPIF begin direct investments in stocks, a 3 percent limit on holdings of each company should be considered, Mizuno said, without explaining why.

The fund has undergone unprecedented changes since 2013, paring its bond allocation to make way for more equities and a foray into alternative investments. GPIF’s overseers at Japan’s health ministry now want to improve the fund’s governance by creating a board of directors, and are debating whether laws should be changed to allow the fund to invest in stocks directly.

“I’m frequently meeting the CIOs of global pension funds, and when I tell them that most of our investments are outsourced and that only some passive domestic bond investments are in-house, they look amazed, and I’m sick of seeing it,” Mizuno said. “From a global standpoint, GPIF’s investment is behind the curve.”

The government panel is likely to meet about three more times to discuss changes to the law determining what GPIF assets can buy directly. The fund’s own staff managed 867.3 billion yen ($7.4 billion) of active domestic bond investments and 31.4 trillion yen in passive Japanese debt holdings at the end of March.
Debate, Law

When the panel met earlier this month, the health ministry proposed establishing a 10-person committee as it moves closer to completing the long-awaited governance revamp. If the panel agree GPIF should begin in-house stock investments, the health ministry will draft a bill along with the governance proposal and submit it to the Diet, which runs through mid-June.

By investing directly in equities, GPIF would gain access to more market information and reduce the fees it pays external managers, according to Mizuno. Under the current law, the fund is also unable to invest in derivatives to hedge investments, and this should also be reviewed, he said.

GPIF’s average annual payout in fees to domestic stock managers over the past three years was about 6 billion yen, it said.
Hiromichi Mizuno is obviously a bright guy who is responsible for a mammoth, political and arcane global pension giant that desperately needs to revamp its governance, investment policy and the way it invests in public and private markets.

I recently covered why Japan's pension whale got harpooned in Q3 2015 as global stocks sold off and how it's looking to diversify into infrastructure. Mizuno has his work cut out for him and I suggest he takes a trip to Toronto to meet up with Ontario Teachers' new CIO, Bjarne Graven Larsen, to discuss his investment strategy and the approach he wants to take.

And I don't blame Mizuno for being sick of outsourcing investments and think it makes absolutely no sense whatsoever to pay fees for things that can easily be done in-house at a fraction of the cost. Canada's large pension funds figured this out a long time ago and now they manage a huge portion of their assets in-house (some more than others).

What other advice do I have for Mr. Mizuno? Beware of hedge funds and private equity funds looking for a nice handout from GPIF so they can gather ever more assets and charge you huge fees. If you decide to invest in hedge funds or private equity funds, make sure you get the right alignment of interests and use your giant size to squeeze them hard on fees.

Trust me, they will bend over backwards for you but before you invest in external managers, make sure you think very carefully of what you want to outsource and what you want to bring in-house.

But I have to tell you,  I got very nervous when I read a Bloomberg article from last October, World's Biggest Pension Fund Is Moving Into Junk and Emerging Bonds. Apart from the terrible timing, GPIF is going to be doling out huge fees to these external active and passive bond investors, many of which will underperform in this environment, and those fees can be used to hire people to manage these investments in-house (at a fraction of the cost).

The problem for GPIF is it's too big, too slow and too political. External managers around the world are all salivating at the prospect of milking it dry. It desperately needs to reform its governance which it's finally slowly doing.

Another problem for Mr. Mizuno is my Outlook 2016 on the global deflation tsunami. I suggest he and everyone else paying huge fees to external managers read it very carefully. I don't envy any CIO at a large pension or sovereign wealth fund in this environment but if Mr. Mizuno is looking for help, I can provide him with four or five names of people in Canada with great experience that can help him structure his investment approach so he can better weather the storm ahead (just contact me at LKolivakis@gmail.com).

Below, Jonathan Beinner, the chief investment officer at Goldman Sachs Asset Management, thinks things are getting "too pessimistic" out there and this market is set for a 2016 bounce. Given the ferocity of the downside moves in oil, stocks and high yield bonds early in the year, I think he's right, we should see a nice bounce in the short term but longer term, deflation will continue ravaging these markets and I wouldn't bet on the Fed hiking rates four times this year.

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