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Japan's Pensions Seek Investments That Beat Indexes


 July 28, 2003

Japan's biggest pension fund, which lost $21 billion of taxpayers' money last fiscal year, plans to invest more money in funds that try to pick winners, rather than those that match benchmark indexes, in an effort cut its losses.

The Government Pension Investment Fund's decision to try to pick funds with the best-performing stocks follows two years of pouring money into so-called passively managed funds that track industry benchmarks. The fund had wanted to boost its passive investments to as much as 80 percent, compared with about 30 percent on average in U.S.-managed funds.

``Japan is once again jumping on a bandwagon'' later than rivals in the U.S. and Europe, said Scott McGlashan, who manages $125 million in Japanese stocks as chairman of Jade Absolute Fund Managers in London. ``There is now a move away from indexing in the U.S. and the U.K. as investors seek to capture stock specific returns rather than market returns.''

The change of emphasis may help it match returns of active funds such as Daiwa Asset Management Co.'s 1.4 billion yen ($12 million) Power Target Select Real Estate Fund, which rallied 49 percent in the past three months, making it the best performer among actively traded Japanese equity funds.

In the same period, the Nikkei 225 Stock Average index and funds that track it such as DLIBJ Asset Management Co.'s Nikkei 225 No-Load Open fund, gained 29 percent and 27 percent respectively.

For the year, the Nikkei 225 Stock Average is up 15 percent.

Investment Change

The Japanese government in September 2001 said it would move as much as four-fifths of its money into passive funds by 2008. As of March 31, the government pension fund had 66 percent of its 32 trillion yen of funds in passive investments.

In the previous year, 44 percent of the total allocation for bonds, equities and short-term assets, was in passive funds. For domestic equities, 71 percent of the money allocated was in passive funds, up from 58 percent from the year before.

The strategy failed to stem losses in the fiscal year ended March 31, a period in which the Nikkei 225 fell 28 percent.

The government fund, which covers the pensions of more than 70 million Japanese citizens aged 20 and above, lost 2.47 trillion yen on all investments in the year, about four times more than the previous year's loss of 620 billion yen. Losses for stock investments alone totaled 3.5 trillion yen.

``We're planning to pour more money into active funds now that we've come close to achieving the passive management target,'' Osamu Okabe, general manager of the Government Pension Investment Fund's planning department, said last week after press conference. He declined to provide specific figures.

In the U.S., the level of passively managed money has remained constant in the past two years, according to a research unit of Daiwa Securities Group Inc. Some 30.1 percent of the pension money is managed through passive investment in 2003, compared with a 30.4 percent in 2001, the Daiwa report showed.

High Returns

Betting on individual stocks can produce high returns. Shares of NEC Corp., Japan's biggest personal computer maker, have more than doubled in value in the past three months, while Sumitomo Heavy Industries Ltd., a maker of construction equipment and heavy machinery, has surged 84 percent.

Japan's largest actively managed fund, Nomura Holdings Inc.'s Japan Stock Strategy Fund increased its assets by 13 percent to 385 billion yen in the past three months.

The fund, known as Big Project-N, includes shares of Canon Inc., Japan's largest office equipment maker, NTT DoCoMo Inc., the nation's largest cell phone company, and Toyota Motor Corp., the world's third-largest automaker, as of June 30, according to the company's website.

Higher Risks, Fees

Still, actively managed funds typically have higher fees and costs because of the extra research and trading needed to identify the best investments. They can also produce bigger losses when managers pick the wrong investments.

Those two reasons were part of the impetus behind the Government Pension Investment Fund's earlier decision to pour new money into passive investments to meet its 70 percent target.

The net asset value for actively managed funds in Japan fell 26 percent to 4 trillion yen in the year ended June 30, compared with a 2.2 percent decline to 1.3 trillion Yen for passively managed mutual funds, according to the Daiwa research unit.

The government pension fund said it paid 17.6 billion yen to investment managers last year, down 40 percent from a year ago, after allocating more money to passive funds.

While the decision to put more money into active funds may cause those fees to rise again, it would also help shift investment to companies that perform better, putting more pressure on chief executives to ensure higher returns for shareholders.

``With the public pension fund's push towards more active funds, we could see some money flowing into Japan's best companies,'' said Toru Ohara, who helps manage $282 billion in global assets as the chief investment officer at Franklin Templeton Investments Japan Ltd.

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