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