Taxi companies know where it's going
Hideo Suzuki, investment managing director of the Tokyo Taxi Companies Employees Pension Fund (TCC), is held up as the ideal of what a Japanese plan sponsor should be like. He has masterminded the global asset allocation of the ¥135bn TCC EPF with some success and has some firm views on where the Japanese pension industry is going wrong.
When pension fund were given the green light to exceed the limits of the 5:3:3:2 rule, back in December 1997, the TCC elected to put a third in the security of Japanese domestic bonds, a third in domestic equities and one-third into foreign currency assets, split 27% equities and 6% bonds. The fund has maintained that asset allocation split ever since. “In reality,” he says, “we had applied in advance of the abolition, one year in advance to be exact, that is how frustrated we were by the regulation.”
So in 1999 the TCC added 3% to the maximum foreign exposure it had previously been allowed. 1998 was the year of the Asian crisis, so the timing was good in terms of diversifying away from Asian assets. The fund put on 40% in performance terms that year and became the inspiration for other pension fund managers.
The breakdown of the TCC assets, based on currency, is as follows: 63% of assets are Yen denominated, 23-25% in US dollars, 11-12% in euros, the remainder in sterling and Swiss francs. Overall, the TTC has decided to operate an unhedged policy, although Suzuki says naturally there are exceptions.
Suzuki is responsible for selecting the managers best able to handle a particular mandate, based on the fund’s own research base. For European equities, he chose Pictet and Commerzbank, and still uses both as they have satisfactorily outperformed their benchmark. For US exposure, he chose Dresdner RCM for growth and MFS for value. For the global mandate, he chose Deutsche Asset Management, Jardine Fleming and Schroders. After a three-year review was recently completed, the board has fired Schroders and re-allocated the assets equally to Deutsche and JF. For bond management, TTC chose Barings.
The remaining assets of the pension fund are divided among the five major domestic fund managers, plus Deutsche. Domestic bond assets are held via one of the Japanese trust banks and one of the domestic insurers.
What is Suzuki-san looking for? “We are not looking for generalists but specialists. You have to find a fund management group with a combination of specific expertise and a great process.”
In 1995, the TTC used Watson Wyatt for help in formulating asset allocation strategy, but since then Suzuki has worked out the manager structure by himself. Some outside observers have suggested he is not capable of monitoring this on his own, but he seems fairly confident of his abilities.
There are a number of processes involved in manager selection. He prepares his own manager structure, then sends that out to a third party to pick up on anything he may have missed. It’s a different approach.
He suggests the majority of plan sponsors are content to use one of the major international consultants, or one of the four domestic consulting firms. “In general, we think it is a natural decision to use such a firm when formulating asset allocation. But each sponsor has to take the initiative in selecting the asset managers and finding out what the managers really believe in and whether their approach is appropriate. The sponsor is best placed to choose. However, plan sponsors tend to rely heavily on the consulting firms in manager selection, often just selecting from a list faxed over, often ending up with unsatisfactory results.
One of the mistakes made by Japanese plan sponsors in this new environment was in the make up of their portfolios, where ‘risk assets’ made up more than 70% of the fund. Therefore taking more of the risk without understanding the need for balance.
He chooses a benchmark based on agreement and understanding of each fund manager. “If I am forced to use a benchmark I don’t understand, then that just increases my risk.” Non- Japanese managers outnumber domestic managers and Suzuki says the structure is very much results-orientated. “This was the result of a very thorough investigation of each manager’s process, resources, etc. All of the factors were weighted and then presented to the board.” They didn’t interview each manager, they sent out standardised questions. A key question was how many other mandates the individual manager is handling, and relevant experience as a portfolio manager. The TTC also wanted to know about fund manager turnover at the group, to establish continuity of management style and returns in relation to the quantitative data. This situation is exacerbated by continual merger and acquisition activity, resulting in changes of fund manager and of process. This is one of the most crucial aspects, says Suzuki: “I am very careful about keeping track of performance continuity and use all the usual tools such as beta, tracking error and standard deviation.”
The average return from the TTC is 9.15%, more than 2% higher than the 6.9% average for pension fund sponsors for the period 1995 to 2000.
Last year the average return would have been –15%, with the TTC returning –11%. Ironically, the board was encouraging him to increase the exposure to equities last year, but he stuck to his guns, in keeping with the long-term aims of the fund.
Suzuki is not a big fan of style rotation. One of his dissatisfactions with Japanese managers is their tendency to recommend the sector that has already had its run. “The trust banks change their asset allocation stance every year, but all they are doing is following the trend. You cannot achieve outperformance by following the trend, you must try to be ahead of it.”
He also observes that many Japanese plan sponsors base their decisions on using international managers on when they have made some additional alpha on their existing mandates. Suzuki’s approach is to use the expertise of foreign managers when markets have not performed well: “In that situation, the managers are working with the plan sponsors to try to work their way out of a problem – our attitude is ‘let the manager prove his worth’.”
On the topic of Japan’s proposed DC schemes, Suzuki-san has become something of a guru. There is a school of thought that suggests your pension fund is safe if Suzuki-san is managing it. However, he is not impressed by the concept as it stands: “People are being told about the prospects of DC and the apparent advantages, but there is still confusion and apathy, especially since there is no compelling reason for people to move from the safety of the second pillar.”
Opinion is divided as to whether it is a good idea. The big plan sponsors are more eager to move to DC to reduce their own risk. For medium and small funds, the cost of individual asset management combined with the educational requirements, is not cost effective. Suzuki adds: “There is very little tax benefit to this proposal. For the company version, the annual tax free amount is ¥200,000, tiered, which is nothing. It’s just not very attractive.”
He agrees with the benefits of diversified investment and the flow of pension assets through the market, “but when I look at the Japanese market, the consumer has been getting burned by the investment firms. The insurance industry doesn’t have much of a track record either”. So the public still feels it is safer to put their money into the post office.
“It’s very important that the large amount of Japanese savings is exposed to the ‘risk’ class, but there has to be a process of education combined with fiscal incentive. “Currently they really discourage investors from using the stock exchange, with the Japanese tax on dividends. Any kind of income or capital gain is going to be taxed heavily. There is also no facility to set losses on stock against your tax bill.
“Sales of funds are poorly governed and there is a large churn and burn mentality that still exists among the trust brokers. There is no trust in the market and no way of building it the way it is currently structured,” he says.