JAPAN - Japan's public pension fund, the world's largest, plans to cut the number of money-management firms it uses to simplify operations and adopt new benchmark indexes to reduce market impact and lower trading costs.
The Government Pension Investment Fund, which oversees JPY122trn (US$1.3trn) and counts BlackRock Inc., Morgan Stanley and State Street Corp. among its fund managers, plans to switch from the Topix index for Japanese stocks and the Nomura- BPI index for bonds, outgoing President Takahiro Kawase said yesterday in an interview, declining to name the new benchmarks.
The fund is "on course" to reduce money managers for passive investments, Kawase said in Tokyo. "There are very thinly traded shares in the Topix, and moving those stocks is a handicap. It'll be much easier for us to trade if we focus on large-cap stocks with more liquidity."
In passive investing, which represented 80% of the GPIF's stock and bond allocations as of March 2009, funds seek to mirror the returns of the benchmark index by owning its constituent securities. Buying and selling smaller, thinly traded stocks and bonds can lead to price swings.
"The GPIF's asset allocation is relied on by other pension funds in Japan as a reference," said Takahiro Tsuchiya, a strategist at Daiwa Institute of Research Ltd. "The move could have a much wider impact on the market."
The Topix Core 30 Index of the 30 largest companies in the broad gauge rose 0.2 percent today, while the Topix Small Index of the index's 1,179 smallest companies fell 0.1 percent, their first divergence since March 16. The Topix was little changed.
In addition to BlackRock, Morgan Stanley and State Street, the GPIF used units of Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. among its 11 passive money managers.
"Being an asset manager for the GPIF is regarded as a status symbol, helping these companies earn the trust of other clients and boosting business opportunities," said Daiwa's Tsuchiya.
The GPIF held JPY13.5trn of Japanese stocks as of December 31, equivalent to 4% of the nation's total market capitalization today, and JPY84.7trn in domestic bonds. It measures performance against the Topix index, including dividends, for domestic stocks, and the Nomura-BPI index, excluding asset-backed securities, for bonds, according to the GPIF's latest quarterly report.
Kawase said the fund's performance in the year to March 31 will be close to the 6.5% gain recorded in the nine months to Dec. 31, since there wasn't a "significant move" in the markets this quarter.
The Topix has climbed 23% since April 1 and the MSCI World Index of 23 developed markets has jumped 48%.
Takahiro Mitani, a former executive director at the Bank of Japan, is scheduled to replace Kawase as president of the fund on April 1.
The GPIF was separated from Japan's Ministry of Health, Labor and Welfare in April 2006 under former Prime Minister Junichiro Koizumi. Although formally independent, the government sets the GPIF's asset allocation and target rate of return.
Under the current four-year plan expiring March 31, the fund's annual return must exceed the increase of wages by 1.1 percentage points, a notice from the health ministry shows. Domestic and overseas equities should account for 20% of assets, according to the notice.
"We will probably end up keeping our current allocation almost unchanged," Kawase said. The health ministry "will probably not present a new target rate of return."
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