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Japan's public pension fund to adopt performance-based fees

Actively managed funds will be held more accountable for returns

Japan's Government Pension Investment Fund earned a record quarterly return of more than 10 trillion yen in the October-December period, thanks to the global stock market rally.

TOKYO -- The biggest public pension fund in the world will change the way it pays fees to investment managers in fiscal 2018, with an eye toward creating an incentive for them to boost returns.

Japan's Government Pension Investment Fund, or GPIF, currently pays fees based on the amount of assets overseen by each managing firm -- applying a predetermined percentage rate to the value of assets under management. Actively managed funds, in which investment managers pick and choose assets to achieve maximum returns, are paid better than passively managed funds, which aim to track the performance of an index, such as the Tokyo Stock Price Index, or TOPIX.

The change applies only to actively managed funds that invest in any mix of stocks and bonds, whether Japanese or foreign.

The GPIF plans to create a new fee structure by April after meeting with each of the 50-plus companies that manage actively managed funds for the pension giant. Such factors as their investment styles and targeted returns will be taken into account when setting the fees.

Under the new system, funds that achieve their predetermined investment return target will receive a similar level of fees as they receive now. If the actual return exceeds the target, however, they will be paid progressively more in proportion to the results.

Missing the target will lead to lower fees, but even then, the payment will be comparable to the fees paid to passively managed funds sitting on a similar amount of assets. Investment returns will be evaluated using a time frame of three to five years, rather than looking at short-term returns.

Actively managed Japanese stock funds used for GPIF assets did not earn their keep over the past decade, with their investment returns undershooting index growth by 0.04 percentage point despite the funds being paid higher than passively managed funds. The GPIF hopes performance-linked fees will change this around.

 "We want to motivate fund managers to improve their investment management capability," President Norihiro Takahashi said.


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