The GPIF is often subject to scrutiny about its investment policy and Mr Mitani confirms there are lively internal discussions on this: “There have always been safety-first advocates and advocates of more aggressive investment. The latter inevitably come to the fore when the stock markets rally, but I do not believe we should automatically hike our equity holdings just because share prices are strong. That said, we might wish to consider slightly greater diversification of assets. There are many types of risks, and while we are not interested in taking greater credit risk, it might be possible to aim for a so-called liquidity premium (sacrificing liquidity to some extent in exchange for higher yields) given our size and investment durations.”
“We would be reluctant simply to increase risk, but we might be interested if that matches the potential returns to some extent, and are not at all opposed to the idea itself of shifting from exclusively traditional assets to a more diversified approach.”
What assets in terms of the risk are acceptable to GPIF? “Private equity and infrastructure would be likely candidates. Real estate investment is not unthinkable, but if domestic property prices were to rise, we could be slammed by the public for sparking a real estate bubble. We might invest if the REIT market was to expand, but it is still too small for us at this point – the BoJ created waves in the market when it announced purchasing operations of just ¥30bn ($307m) per year. “Hedge funds would be even more difficult than property from an administrative standpoint. For long-only fund managers, we’re able to assess the status of their holdings on a daily basis, but hedge funds cannot disclose such information.
“In contrast, the markets for PE and infrastructure, though not very large in Japan, are considerable on a global scale. They are attracting growing investment from overseas pension funds and accounting for an increasing portion of their portfolios.”
Would GPIF be prepared to invest immediately in PE or infrastructure? “We would not be able to act right away. Though much depends on the methods and timing, PE and infrastructure have different risk profiles than traditional assets, and we do not have staff with sufficient knowledge in this area at present. The problem would be how to fill the gap in our understanding and capabilities. Personnel would be the biggest barrier, and dealing this will be tough given the severe budgetary restraints on independent administrative agencies. How would you evaluate GPIF’s bond investment? “I think bond diversification is also worth considering. For instance, we have talked in the past about currency-hedged foreign bonds. However, we found when we reviewed the manager structure of domestic bonds that the system cannot be adjusted immediately to the needs of such proposals. It takes time and money to realise changes. The market for inflation-linked government bonds is currently small. I understand that a new type of product is due in September, but we’ll have to see the actual offering first.”
How do you view emerging market bonds? “We are prepared to allow emerging market bond investment within a certain range if we receive such a proposal from a manager with an active foreign bond strategy. However, we are not considering any fund specializing in such bonds. We similarly allowed active foreign equity investment within a certain range before establishing a specialised fund for emerging market stocks. Our thinking on emerging market bonds is the same.” How do you evaluate your emerging market equity investment? “While bigger than we initially planned, it is still just over ¥100bn. There remain liquidity issues, and the situation does not allow us to invest a hundred billion in a single fund. We plan to raise our investment gradually with a close eye on market developments.
What is your aim in your current review of fund managers for domestic stocks? “This is a regular review. We are looking at the manager structure for domestic stocks. Active managers have not performed strongly, partly because the domestic stock market environment itself had been so sluggish until the Abe administration came to power. The performance of investment styles that had once thrived deteriorated sharply around the time of the Lehman shock, and many funds have subsequently failed to come back. We plan to choose from a wide range of fund managers with diverse knowhow without prior conditions. We had previously set certain ratios for individual investment styles and made our choices within those parameters, but we will not be so specific going forward. We would like to reorganise our active managers concentrating on those that can maintain stable alphas under various market climates.”
You’ve been known to refuse to consider managers on the grounds of their organisational structures. “Funds with weak organisations and dependent on the capabilities of one or two specific fund managers may find it difficult to deal with sudden events. We examine the organisational setup as part of our review but do not have any minimum requirements.”