“Principled Management” is key

I’ve been the Chief Investment Officer and Managing Director of Chiba Bank Pension Fund since 2017. Before that I worked in international finance at a leasing company and worked in asset management and investment banking at a bank. When I first became asset manager at Chiba Bank pension fund, I set out to visit more than 20 other Japanese pension funds with more progressive investment programs. I wanted to exchange ideas and learn more about their basic investment policies and the composition of their portfolios, even though I had been in asset management for some time.

My first major task as Managing Director was to re-evaluate our financial condition. Until then, our portfolio had maintained a rather traditional profile consisting of mostly Japanese equities. One manager oversaw the entire portfolio, as opposed to individual managers handling particular asset types. When I arrived, however, the market environment had changed drastically and the inverse correlation among assets no longer applied, so I knew we had to rethink our portfolio from the ground up.

Investment requires an “ethos,” so I developed an ethos and guidelines that would govern our portfolio and investment policy and that we would stick to.  I established our internal “Rules for Investment Management” and “Philosophy of Investment Management.”  My intent was to maintain our investment principles without being distracted by the trends or changes in personnel.

Based on my long investment experience, I formulated the following ten “Rules for Investment Management”:

The purpose of my “Philosophy of Investment Management” is to establish guidelines and minimize the risk that one person in authority could lead our investment policy astray, regardless of his or her personal knowledge or experience.  It’s a reminder of our core values: seek diversity, avoid chasing fads and flimsy returns and stick to our principles. Clearly identify the source of potential profit. Don’t invest where liquidity is low and the risk of losing underlying assets is high. Evaluate both quantity and quality, but emphasize qualitative analysis.

Following these guidelines and philosophies, I embarked on a complete optimization overhaul of our portfolio. My goal was to minimize downside risk and add flexibility to the asset mix, half global bonds and half global equity. When bond rates turned negative, I sought to diversify and decentralize income sources. I compiled a global equity portfolio based on a ratio of 4:6 offensive vs. defensive factors. I chose funds based on “the purposes and objectives” of each and whether each fund produced results in line with “the purposes and objectives”. Had I selected funds based solely on performance matrices such as good returns and the Sharpe ratio, our portfolio would been only partially optimized. The correlation among all funds would have been tighter had I compiled a portfolio of only well-performing funds. By diversifying the purposes and objectives of component funds, they complement each other.  I sought to minimize risks, while maintaining a relatively high equity ratio. I included a framework for alternative investment in the portfolio, but I held off investing in alternatives because excess liquidity made them expensive.  There is still room for creativity without investing in alternatives, so for now, our portfolio doesn’t include them.

When I see a portfolio, I understand an asset manager’s way of thinking and intent. If not, it’s possible that there was no guiding policy or the manager lost his way by frequently replacing funds.

Adopting Japan’s Stewardship Code

Our pension fund adopted Japan’s Stewardship Code* in September 2019. I’ve thought for some time now that if an asset manager invests in improving corporate value, our pension participants will benefit. Therefore, pension funds must fulfill their responsibility by participating in the investment chain as asset owners and essential stakeholders.  Unfortunately, most corporate pension funds haven’t adopted the Code. I believe most funds either misunderstand the Code or don’t know enough about it and overestimate the monitoring involved.

I had hope to enhance Stewardship activity by adopting the Code together with other pension funds, a group of local banks, so I contacted them. At first, I heard some were bewildered, so we exchanged information and listened to what each of the funds had to say.  Ultimately, seven pension funds, including ours, adopted the Code and acknowledged that we have to work on stewardship activity to fulfill our responsibility as asset owners.  We have to take a first step without exaggerating the burden of monitoring stewardship activity.  To start, we need only to meet the minimum requirement. After that, we can figure it out as we go.

When each fund acts alone, it is difficult to make progress. But when we share opinions with peers and discuss our concerns thoroughly, we can solve problems. I hope our actions can help other pension funds and serve as an example for fulfilling the responsibilities of the Code.

Our fund requires all management companies, including foreign stock and bond managers, to report their stewardship activities. If we are in a fiduciary relationship with them, I want to know how they perform their stewardship duties. We also want to assess each manager’s attitude and positivity toward stewardship activities. Under the Code, managers are required to explain how performance is linked to their stewardship activity.  I think this can only enrich our discussions at management report meetings, which were previously more of a formality.

In the half-year since we adopted the Code, we have suggested some changes to manager’s reports of their stewardship activities:

I believe these suggestions constitute our first steps as a responsible asset owner under the Stewardship Code.

Yoshikazu Ishii

Chief Investment Officer & Managing Director
Chiba Bank Pension Fund