GPIF pays out record fees for fiscal year

Money managers garnered a record ¥61 billion ($553 million) in fees managing the Government Pension Investment Fund's ¥186.2 trillion portfolio — roughly half of Japan's pension assets — for the fiscal year ended March 31.

Those outlays easily topped the previous record of ¥48.7 billion for the year ended March 31, 2018. At the April 2018 start of the following fiscal year, GPIF moved to achieve a better alignment of interests with its external managers, instituting higher performance fees but only passive payouts for managers that fail to top their benchmarks.

The year the new system went into effect, GPIF's fee payments plummeted to ¥29.5 billion before rebounding slightly to ¥31.9 billion for the year through March 31, 2020 — roughly 2 basis points of the weighted average of the portfolio's holdings.

GPIF's then-chief investment officer, Hiromichi Mizuno, insisted the world's biggest pension fund wasn't intent on lowering fees and stood willing to pay handsomely for performance — even as roughly 80% of the pension fund's portfolio continues to be managed passively. The fund ended its March 31 fiscal year with roughly 25% of its portfolio, or more than ¥47 trillion, each in domestic and foreign stocks and bonds. Within those segments, active allocations came to 27% for domestic bonds, 24% for foreign bonds, 12% for foreign stocks and 7% for domestic stocks.

The volatile, pandemic-stricken year through March 2021 effectively became the first broad test of GPIF's willingness to pay for alpha, with more than 80% of the pension fund's roughly 50 active managers outperforming their benchmarks — many by substantial margins. The year before, 18 managers outperformed while 29 underperformed. For the year ended March 31, 2019, 24 bested their benchmarks and 25 underperformed.

GPIF's latest annual report suggests that managers were able to share in the portfolio's stellar 25% — or $340 billion — gain for the year, with fee payouts up more than 90% and climbing for the first time to roughly 4 basis points of the portfolio's value.

Baillie Gifford Overseas Ltd., which managed a ¥1.2 trillion overseas equity mandate for GPIF as of March 31, stood out among the year's winners. The Edinburgh-based firm garnered fees of ¥14.4 billion for the three years through March 2021, up from ¥3.7 billion for the three years through March 2020, after besting its MSCI Kokusai benchmark by more than 19 percentage points for the latest year.

That windfall boosted the firm's estimated margin to 40 basis points for the three years through March 2021, more than double its 18-basis-point margin for the three years through March 2020.

(Starting with the fiscal year ended March 2016, GPIF switched to providing manager-specific fee figures for three-year periods in place of single-year data. Single-year data for managers with mandates dating back to the fiscal year ended March 2014 can still be calculated.)

By asset class, however, GPIF's global fixed-income managers led the charge for the latest year, garnering fees of ¥25.4 billion, or more than 40% of total outlays, up sharply from ¥7.1 billion, or 22% of the previous year's total. The annual report showed 19 of the fund's 21 overseas bond managers beating their benchmarks for the year — 11 of them by 5 percentage points or more.

That record ¥25.4 billion of fees was powered in part by the GPIF board's decision to boost the target weight for global bonds in the pension fund's portfolio to 25% from 15% as of April 1, 2020.

Data from GPIF's annual reports showed $69 billion being shifted into global bonds from other asset segments during the year ended March 2020, ahead of the formal asset allocation change, followed by another $89 billion during the latest fiscal year. However, the vast bulk of that two-year surge in allocations — ¥17.7 trillion out of ¥19.5 trillion — went to passive strategies. Only an extra ¥1.8 trillion ended up with active managers.

Still, some analysts noted that to the extent global bond managers were able to put that money to work while pandemic-related volatility was depressing valuations, the shift could have served to bolster performance fees last year as well as ordinary management fees.

A record $2.9 trillion of investment-grade corporate bonds was issued worldwide in 2020 with much of it "between March and May of that year as a direct consequence of corporate bond buying programs initiated by the Fed and the European Central Bank," noted Jean De Kock, Singapore-based fixed-income investment analyst with Mercer Investments. "Active asset managers looking to put money to work would have been well placed to take those bonds on at the wider spreads on offer at the time, benefiting subsequently as spreads ground tighter over the remainder of the year, he said.

Having fresh funds to invest around the height of the pandemic crisis in March 2020 should have contributed to the breadth and depth of the outperformance GPIF's annual report shows for the fund's overseas bond managers last year, he said.

GPIF's annual report — the one time each year the fund provides details about the amount of money each of its external managers oversees and the fees each receives in return — showed Boston-based Fidelity Investments enjoying some of the latest year's strongest returns and rewards.

Fidelity's ¥1.13 trillion overseas bond portfolio bested its Bloomberg Barclays U.S. Aggregate Bond benchmark by 11.72 percentage points for the year — rebounding from underperformance of 5.77 percentage points the year before, when it was managing a smaller pool of ¥694.8 billion.

On the back of that performance, the fees GPIF paid Fidelity for the three years through March 2021 surged to ¥8.24 billion, for an estimated margin of 24 basis points, from ¥1.89 billion, or 9.1 basis points, for the three years through March 2020.

Other bond managers enjoyed solid — if less spectacular — gains.

Among them, Morgan Stanley Investment Management saw fee margins improve to an estimated 14.2 basis points from 5.3 basis points for the year before. The firm's ¥1.2 trillion portfolio outperformed its Bloomberg Barclays Global Aggregate Bond benchmark by 5.21 percentage points.

Newport Beach, Calif.-based Pacific Investment Management Co. LLC, in turn, saw its fee margins rebound to 16.1 basis points from 4.4 basis points as the firm's ¥1.27 trillion portfolio beat its global aggregate benchmark by 3.42 percentage points.

After global bond managers, domestic equity managers saw the next biggest jump in earnings, with combined fees rising 95% year on year to ¥12.7 billion.

Firms posting strong gains included Capital Group Cos. Inc. and Fidelity, with both outperforming their TOPIX benchmarks by more than 12 percentage points for the year. Capital Group managed ¥673.2 billion and Fidelity managed ¥521.2 billion in active domestic equities.

Capital Group's three-year fee total surged to ¥5.6 billion from ¥2.1 billion for the three years ended March 2020.The firm's estimated margins improved to 83 basis points from 48 basis points.

Fidelity's three-year total jumped to ¥2.4 billion from ¥1.29 billion, with its margins climbing to 46 basis points from 38 basis points.

If the latest figures show GPIF's three-year-old fee experiment in a relatively attractive light for money managers, at the end of the day it remains a program with sharp teeth — as shown by the experience of Walter Scott & Partners Ltd., the Edinburgh-based global equity boutique of BNY Mellon Investment Management.

After garnering ¥4.1 billion in fees the prior year for outperforming its MSCI Kokusai benchmark by 7.8 percentage points in the global equity market sell-off of March 2020, Walter Scott took in a meager ¥197 million for the latest year, after trailing the index by 8.2 percentage points. The firm's estimated margins dropped to 2.8 basis points from roughly 90 basis points.

One executive at a money manager with a GPIF mandate, who declined to be named, said he welcomed the continued growth of institutional investor demand for performance fees but that trend will leave some firms under pressure to balance their institutional business with steadier streams of income on the retail side of the business.

Meanwhile, if intermittent underperformance remains a business challenge under the GPIF's fee structure, the latest annual report included signs that managers are being kept on a tighter leash in that regard.

Eiji Ueda, who replaced Mr. Mizuno as GPIF's chief investment officer in April 2020, noted in his review of the year in the annual report that eight active managers had been terminated over the past year.

A GPIF spokeswoman declined to name the terminated managers.

The annual report showed Tokyo-based Asset Management One Co. Ltd., J.P. Morgan Asset Management and Eastspring Investments Inc. being terminated from active domestic equity mandates that came to ¥531.1 billion, ¥319.4 billion and ¥138 billion, respectively, at the close of the prior year, and Tokyo-based Nomura Asset Management Co. Ltd. losing an active overseas equity mandate of ¥83 billion.

Elsewhere, a handful of active overseas bond managers fell off the GPIF's list in the latest annual report, including Manulife Investment Management (U.S.) LLC, which managed ¥701.2 billion for the fund the year before, Franklin Advisors Inc. as subadviser for a Nomura strategy running ¥654.6 billion and a Nomura Corporate Research and Asset Management Inc. mandate for ¥125.9 billion in U.S. high-yield assets.

Spokesmen for those firms declined to comment or didn't respond to requests for comment.