World’s Biggest Pension Fund Makes Some Important Changes

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The $1.54 trillion Japanese Government Pension Fund (GPIF) has made a change regarding its fee structure in an attempt to potentially boost returns. According to The Financial Times, the Government Fund has adopted a new fee structure for its active manager to increase the incentive to produce outsized returns.

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Based on the new structure, which is to be implemented within the next month, the fund will begin paying managers a fee that is based on the returns more than benchmarks. The strategy is based on the GPIF belief that current managers have been far too concerned about increasing assets instead of taking the necessary risk to reach alpha- the excess return relative to the performance of the benchmark index.

“By introducing the new fee structure, we would like to build a win-win relationship between GPIF and external asset managers,” said the fund. “Without excess returns, their fee must be equal to that of passive managers with the same amount of asset size.” the Japanese Government Pension Fund  added that its current pay rate does “not motivate asset managers to achieve alignment of interest between GPIF and external asset managers.”

The most recent full-year financial report for the GPIF shows the fund making a 5.86% return, below the 6.22% benchmark. For the past 11 years, the GPIF, which was established in 2006, produced a total performance of 2.91%. This is just 0.04 percentage point over the benchmark of 2.87% during the same period.

The idea for a change in fee structure for the fund was the brainchild of GPIF President Norihiro Takahashi. He told a delegation of senior Australian fund management executives that he wanted to entertain the idea of a variable fee structure instead of a fixed one, according to the Australian Financial Review.

“If a manager gains alpha, GPIF would pay a manager a certain fee. If a manager gains above alpha, GPIF would pay more, and we would not limit the fee,” Takahashi told the delegation. “If a manager gains below alpha, GPIF would pay less. Finally, if alpha is at zero or negative, GPIF would pay the manager an equal amount to that a passive-style manager would receive.”

According to Takahashi, the variable pay structure is inherently fair because it is based on the performance of active managers achieving alpha.

“But some managers are reluctant to take more risk to gain alpha,” he added, “because they can gain relatively high fees compared to passive-style managers, even when they gain zero.”

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