Japan’s GPIF emphasis on low fees giving way to search for alignment

Money managers say a fundamental reconsideration of fee arrangements is underway at the world’s biggest pension fund.

Executives with firms managing money for Japan’s ¥144.9 trillion ($1.3 trillion) Government Pension Investment Fund, Tokyo, speaking on condition of anonymity, report having broad, open-ended discussions with officials there — “brainstorming,” according to one — aimed at hammering out a better alignment of interests.

For now, the giant pension fund remains better known for squeezing fee concessions from managers in exchange for multibillion-dollar mandates, while setting the standard in the region when it comes to client service demands.

Norihiro Takahashi, GPIF’s president, in a January interview with Pensions & Investments, suggested his fund’s success in lowering fees in years past might be proving an obstacle now to forging partnerships with superior managers.

The pension giant’s latest annual report, released July 7, noted its ¥40 billion in manager fees for the fiscal year ended March 31 came to roughly 3 basis points of its portfolio, well below the more than 20-basis-point average for 11 public funds from Canada, Norway, the U.S., Sweden and South Korea referenced in the report.

However, with those overseas funds already making allocations to higher-fee alternatives that GPIF is just gearing up to add, the gap could be less dramatic than those numbers suggest. For example, a P&I estimate from available GPIF data points to roughly ¥11.5 billion in fees paid to global equity managers for the fiscal year ended March 31, or roughly 24 basis points of the fund’s ¥4.732 trillion, or $42.5 billion, in global equity allocations. By contrast, the $176.5 billion Florida State Board of Administration paid fees of $137.1 million to global equity managers for the fiscal year ended June 30, 2016, or 29 basis points of the system’s $45.8 billion allocated to that asset class, confirmed spokesman John Kuczwanski.

The annual report’s summary of compensation outlays for the year said that going forward, GPIF will strive to achieve “efficient, reasonable” fee levels.

Looking for win-win

GPIF executives are working now, on the basis of its fee structure, to create “win-win relationships” with managers, said spokeswoman Naori Honda, in an email.

That doesn’t mean the pension fund is getting ready to throw money at managers.

Instead, say executives with firms now on GPIF’s manager list, the big Tokyo pension fund is showing every sign of expecting favored managers to sing for their suppers — by effectively living or dying on performance-based fees.

For the latest fiscal year, performance fees introduced across the board when GPIF tripled its active foreign bond manager lineup in October 2015 appear to be boosting compensation for that asset segment.

Overall compensation for foreign bond managers overseeing ¥12 trillion in passive strategies and ¥7.7 trillion in active came to ¥12.5 billion as of March 31, up 37% from the year before. Fees came to 7 basis points of the overall foreign bond portfolio, up from 5 basis points the year before, the annual report showed.

Good performance by the GPIF’s active foreign bond managers “contributed to the increase of fees” in fiscal 2016, confirmed Ms. Honda.

According to P&I estimates, among managers with a three-year track record,

Morgan Stanley (MS) Investment Management, saw its compensation for managing ¥401 billion in GPIF assets improve to roughly 16 basis points from 12 basis points for the previous year. MSIM bested its Bloomberg Barclays Global Aggregate benchmark by an annualized 73 basis points for the period.

BlackRock (BLK), which trailed the same index by an annualized 14 basis points, saw its corresponding compensation figures slip to 12 basis points for the ¥534.3 billion yen it managed as of March 31, from 13 basis points the year before.

A number of managers say the discussions with GPIF this year on better alignment of interests have focused on boosting performance fees while lowering, or even eliminating, base fees — a trade-off, noted one, that is conceptually elegant but tough to get right in practice.

Executives agreed in describing their conversations with GPIF as unusually broad. Managers say GPIF executives have given them no indication of when, or even if, to expect conclusions about the pension fund’s fee arrangements.

Ms. Honda declined a P&I request to interview Mr. Takahashi for now.

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