November 22, 2013

Advisory Panel On Public Funds: Key Recommendations

Advisory panel formed under the Cabinet Office regarding the management of $ 2 trillion public and quasi-public funds that are currently managed by the below institutions submitted its final report on November 20th.

  • Government Pension Investment Fund (GPIF) ($1.2 trillion) 
  • Federation of National Public Service Personnel Mutual Aid Associations (KKR) ($78 billion), 
  • Pension Fund Association For Local Government Officials ($175 billion) 
  • The Promotion And Mutual Aid Corporation For Private Schools Of Japan ($36 billion) 
  • Other 100 public institutions
  • 86 national universities.

The below are some of the recommendations the panel made in the report.
  1. The public funds should review the current portfolio allocation that is heavily biased towards domestic bonds.
  2. The public funds should review their investment return targets and risk tolerance levels.
  3. For increased portfolio diversification, the public funds should consider investing in new asset classes, such as REITs / real estate, infrastructure, venture capital, private equity and commodity. 
  4. The public funds should consider increasing allocations to active management funds. Establishment of a "baby fund" (an internal segregated account) may be considered for more flexible deployment of capital.
  5. The public funds should review appropriate benchmarks for passive investments. For Japanese equity, new benchmarks, such as JPX Nikkei 400 that focuses on constituent stocks' ROE, may be considered.
  6. Ministries overseeing the public funds should duly entertain the initiatives of each fund management institution.
  7. It is desirable that key investment decisions are made collectively by investment experts who work on a full-time basis and who are free of conflict. 
  8. To invest in new asset classes and to have robust risk management capability, it is necessary that the public funds are amply resourced and staffed with top-class professionals. To this end, the HR and expense restrictions imposed by past cabinet decisions should be relaxed. 
  9. GPIF should be reorganized under a new law that specifically caters to its unique status. GPIF should be given a higher degree of independence and authority on the condition that it maintains a high level of transparency and accountability. The change should enable key decisions be made by its board, whose member would be conflict-free investment experts. As an interim measure under the existing governing law, transferring/delegating investment decision making authority from the CEO to an investment committee made up of conflict free investment professionals should be considered. 
  10. "Forward looking" risk management should be introduced and attentions should be paid to inflation risks. Investing in inflation-linked JGBs and use of derivatives should be contemplated for risk mitigation. 
  11. The public funds should consider more active use of shareholder rights, despite their public nature, in order to maximize investment returns.  
  12. GPIF should immediately work on the followings: 
              - Review of investment allocation within the current base portfolio
                guidelines, increasing allocations to active funds
              - Review of risk/return target
              - Review of benchmarks for passive investments
              - Application of forward-looking risk management,
                inflation risk hedging
         
              GPIF should work on the followings in the next 12 months:
              - Revision of base portfolio allocation
              - Introduction of new asset classes
                (mainly those with liquidity and NAV transparency)
              - Establishment of a baby fund
              - Employment of full-time committee members and investment
                professionals with significant expertise
        
             GPIF should work on the followings with necessary
             legislative changes.
            - Introduction of new asset classes
              (with lower liquidity and lower NAV transparency)
            - establishment of fully-empowered board

       



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