Introducing the GPIF

Back in May, this blog covered the importance for US companies (or any company for that matter) in understanding your shareholder profile before setting goals for the expansion of your shareholder base beyond your own borders. One non-US investor that we highlighted in the post was the Swiss National Bank (SNB), which has been a huge buyer of US equities. Unbeknownst to many IROs, the SNB, which controls Switzerland’s monetary policy as its central bank, has been putting its foreign-currency reserves to work through investing in equities in both developed and emerging markets. In 2015, the SNB was a buyer of more than $13 billion in US equities.

From the perspective of an IRO, this should look like good news–a new buyer of equities to target that will likely have a long-term investment approach. While SNBs commitment to overseas equities and its typical holding period are yet to be determined, an approach by IR and management to attract its attention would be foolhardy. SNB has decided to put its dollars (and other currencies it holds) to work via passive, index replication strategies [sigh]. We are a bit exasperated because the growth of passive, index-replication strategies continues seemingly unabated, as we discussed back in April.

On the heels of the SNB we now have another significant acronym-identified investor that has happened upon the scene in the world’s equity markets. The Government Pension Investment Fund (GPIF) of Japan announced in 2014 a  plan to shift a significant amount of its assets from fixed-income securities to equities as part of Prime Minister Abe’s well-chronicled reform efforts to jump-start growth.

Although GPIF is not a household name outside of Japan, given its move to increase its emphasis on equities, both domestic and foreign, it’s time to get a bit more familiar with one of the world’s largest funds, managing nearly $1.3 trillion in total assets! Along with GPIF’s investment reform came a bit more transparency. For the first time, GPIF has detailed its entire portfolio of domestic bonds and equities and foreign bonds and equities. Unfortunately, the ownership data is bit stale (as of March 2015) and while not misleading, it does not tell the entire story, as GPIF outsources its domestic and foreign equity investments to a stable of 21 investment managers. GPIF itself does not manage any of the close to $300 billion in foreign equities in its portfolio.

The good news is that in addition to major indexers like SSgA and BlackRock (and four others) that got a piece of the GPIF pie, active managers were not left out in the cold. 15 asset-management firms that adhere to active investment styles, including MFS and Wellington, were allocated assets. GPIF’s move to liberalize its portfolio and its decision to allocate at least a portion of its assets to active managers is a positive development for IROs looking to increase overseas ownership, even if it’s accomplished somewhat indirectly.

Of course, not all companies will reap the benefits of yen flowing into equities denominated in dollars and other currencies. To handicap the likelihood of your company getting the attention from the GPIF and its managers, we’ve provided a few different views of the fund’s March 2015 equity portfolio below.

Table 1: Equity Holdings by Country

GPIF’s non-Japanese equity holding are diverse, as the fund’s advisors have invested in equities from over 50 different countries. However, US equities dominate the foreign portfolio with more than 50% of reported assets. The first three countries in the famed emerging-markets BRIC amalgam each garner less than 1% of the overseas portfolio. Exposure to Chinese equities through Hong Kong-listed and mainland-listed companies is just less than 4% of foreign equity assets.

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Table 2: Market Cap Breakdown

To the victors go the spoils. The GPIF foreign portfolio is dominated by large and mega-cap companies. Together these two groups account for close to 87% of the fund’s assets allocated to foreign equities.

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Table 3: Sector Breakdown

Our excitement regarding GPIF’s selection of asset managers that follow active investment strategies to manage a portion of its assets is somewhat tempered by the table below. We compared the allocation of foreign equity assets by sector to the sector weighting of the MSCI World Index as of March 2015. GPIF’s weightings don’t track the index to the precise amount that you would find in a pure index fund, but they’re pretty close.

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Table 4: Top Positions by Security

Try finding a name you don’t recognize below. The GPIF ex-Japan portfolio is top-heavy with blue-chip companies. The column on the far right is an indication of where GPIF would have ranked on the shareholder lists of each company as of March 2015. From an investment perspective this ranking is not relevant, as these positions are likely managed by more than one investment firm. However, it does illustrate the buying power of the GPIF’s asset base and it does introduce uncertainty as it relates to proxy voting. The GPIF has signed on to Japan’s Stewardship Code (also pushed by Prime Minister Abe), which includes a statement to exercise your right as a shareholder to vote to enhance long-term shareholder value. However, the Stewardship Code is only relevant to GPIF’s domestic investments. Our expectation is that the GPIF will not vote its shares at shareholder meetings outside of Japan.

Table 4

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Contributions from Vikram Pursnani, Matthew Davis and Christopher Stroh of Ipreo’s Corporate Analytics team