Japan’s Government Pension Fund Changes Fee Structure

The move is aimed at providing an incentive for active managers to boost returns.

Japan’s $1.54 trillion Government Pension Investment Fund (GPIF) is revising the fee structure for its active asset managers in a move to increase their incentive for producing higher returns, according to a report from the Financial Times.

Under the new structure, which will be implemented next month, the fund will pay the managers a fee that is based on the excess returns they produce.  The GPIF said its external asset managers are too focused on acquiring more assets, and have avoided taking the necessary risks required to reach their target alpha.

“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.” GPIF added that its current pay rate does “not motivate asset managers to achieve alignment of interest between GPIF and external asset managers.”

Active asset managers for GPIF include Amundi, Schroders, Invesco, Eastspring, Nomura, Fidelity International, JPMorgan Asset Management, and UBS, according to the FT.

In the GPIF’s most recent full-year financial report, the fund had a return of 5.86%, which was below its benchmark of 6.22%. And for the 11 years since the GPIF was established in 2006, the total rate of return on all investment assets was 2.91%, which produced excess returns of just 0.04 percentage points over the benchmark of 2.87% during that same period.

The idea of changing the way the fund pays its active managers was first floated in October by GPIF President Norihiro Takahashi, who told a delegation of senior Australian funds management executives that he wanted to propose 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.”

Takahashi said the fund believed a variable pay structure would be fair because it expects active managers would gain enough 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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