TOKYO -- Signs are emerging that professional investors taking an active approach to management will lead the market once again now that Japan's public pension behemoth is slowing the pace of its share purchases.
The Nikkei Stock Average edged up Wednesday, with meat distributor NH Foods, railway operator JR West and other companies focused on domestic demand rising. These stocks tend to have relatively low volatility.
When less-volatile stocks go up across the board, one may associate the development with buying linked to smart beta. But Masahiro Suzuki at Daiwa Securities rejects this view. "Right now, investors are most comfortable buying domestic-demand stocks," he says. "As a result, their volatility is low."
It is no wonder that investors are sensitive to developments in passive management. Since last year the Government Pension Investment Fund and other public investment entities using index-linked management have been overtaking the market with large amounts of capital and their strategy of buying a broad range of stocks in chunks.
The GPIF's business review for fiscal 2014 released Friday shows its dominant performance. With the strong market rally last fiscal year, active managers -- ones using corporate analyses and share price levels to choose stocks one by one -- scored an average return of close to 30%. But they were outperformed by the Tokyo Stock Exchange's Topix index and other barometers. In other words, even though they took the time to handpick shares, they still got beaten by the broader market.
The GPIF does engage in active management, but passive investing is employed on 87% of its assets targeting domestic equities.
"The GPIF buys index components as if it were sweeping them up," says an unhappy fund manager. "That makes it harder for us active managers to do our job and pinpoint promising stocks."
But signs are emerging that the passive investment era is drawing to a close. The GPIF's holdings of Japanese shares had increased to 22% of its portfolio as of the end of March, approaching its 25% target. "The portfolio policy review is in its final stage, so the fund's impact on the market will be limited," says Akihiro Murakami at Nomura Securities.
Allianz Global Investors Japan says an investment trust it launched in March that targets Japanese shares it handpicked is performing gradually better and is outperforming the JPX-Nikkei Index 400, its yardstick. "Our technique of carefully identifying the stocks of companies whose earnings we expect to improve is starting to bear fruit," says a relieved Kazuyuki Terao at Allianz.