Signs that Japanese regulators are seeking ways to boost returns of the country’s huge public pension fund could eventually open new opportunities for foreign asset managers in areas such as absolute return and alternatives.

Executives with foreign and domestic managers alike said recommendations in May by Japan’s Council on Economic and Fiscal Policy for managing the ¥150 trillion (US$1.4 trillion) Government Pension Investment Fund are early steps in a process that could see more of that fund’s assets moved from low-yielding Japanese government bonds to actively managed and absolute-return strategies.

Foreign managers already have benefited in recent years from 2001 reforms that boosted the amount of Japanese pension assets outsourced to external managers. GPIF has an 80 per cent asset allocation to passive strategies, benefitting the index giants Barclays Global Investors and Street Global Advisors, which garnered ¥11 trillion and ¥5 trillion respectively over the four-year period ended March 31, 2007.

 Average GPIF investment returns of roughly 3 per cent a year over the past five years have met or exceeded the statutory target of 3.2 per cent, but with a population profile that has left Japan’s working-age population declining by hundreds of thousands of people every year, pressure to boost returns can only grow. “There’s definitely a feeling of change in the air” that could eventually lead to more assets being allocated to strategies with greater potential to generate alpha, said Paul Price, global head of institutional business with Pioneer Investments.

While a move into higher-return strategies could play further into the strengths of foreign managers, it won’t happen quickly, market veterans warned. With reports quickly emerging of key ministers opposing some of the council’s proposed pension reforms, “we shouldn’t anticipate any imminent government initiatives,” Didier Devreese, president of Schroder Investment Management (Japan), said.

Still, small changes in Japan — especially for such a huge and influential pension fund — can be significant, market veterans said. In Japan, this is “how things start,” said Doug Hodge, a Tokyo-based managing director of PIMCO’s Asia-Pacific business, and a period of glacial movement can end up in a huge shift. But any move toward alternatives will be gradual.

The size of the GPIF makes it tough to allocate money to areas like hedge funds of funds in a way that would have a meaningful impact on the entire portfolio, while losses on new types of investments could be problematic for such a public entity, said the Tokyo head of another major foreign manager. S

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