After 2 years of ultra-loose monetary policies during a pandemic, countries around the world are starting to resume more normal stances. What are the main concerns of pension fund management as markets approach a turning point? Seiji Ogishima, President & Representative Director of Nomura Fiduciary Research & Consulting Co., Ltd., offers his views.
Translated from an article originally published in AL-IN vol. 63, March 2022.

Q.: As the leader of one of Japan's top management consulting firms, what is your view of the current market environment?

The world is now facing two megatrends -- climate change and new strains of the coronavirus -- which are having major economic and societal impacts.  To understand how those trends affect pension fund management, we need to break them down using PEST analysis, which considers the macroeconomic environment.  PEST examines a management strategy in terms of politics, economics, society, and technology.  

Politics refers to the political and geopolitical risks of a particular country and region, as well as support for platformers, such as GAFA.  These factors have a significant impact on risk assets.

Economic analysis under PEST focuses primarily on inflation risks.  The current supply chain disruptions, which are one of the causes of inflation, will fade once the coronavirus recedes; therefore, they don't pose a long-term problem.  Furthermore, since the global economy is basically strong, the return to pre-pandemic monetary policies will not cause risk assets to fall sharply.

PEST's society lens looks at ESG, among other socially relevant factors.  The short-term impact of ESG on asset prices is expected to be small, as many analysts predict a negligible impact on the risk-return of stocks.  Of course, we must commit ourselves to activities that will last several decades, but realizing a sustainable society and managing risk-return operate from different perspectives.

A technology analysis typically examines factors such as DX and vaccine development.  Increased efficiency has boosted productivity and data is an increasingly valuable asset.  Companies that fail to adjust or keep up will be weeded out.  Technology is an important factor in determining the rate of economic growth and the pandemic has only accelerated this trend, which is a positive factor.

In the current environment, politics stands out as the most negative price volatility factor under PEST.  Political events, and especially geopolitical risks, will exert considerable impact on the market for the time being; however, the rise of platformers will have a greater long-term impact.  Platformers in the asset management industry are gatekeepers.  As the global money glut makes it harder to identify and invest in quality products, gatekeepers have become essential to asset management.  The traditional investment process, whereby pension funds managers meet directly with individual managers to invest, may be no longer be the norm.
Q.: More and more, investors need to think about changes in the short-, medium-, and long-term.  In this environment, what measures can pension investors can take?

Since the global financial crisis, investing in passive management of capitalization-weighted indexes has provided satisfactory results, but I believe that strategy will become less viable in the future.

With traditional assets, we can consider factor-based carry and roll-down strategies for bonds, and selective equity investments and low-risk equity management for stocks.  Capitalization-weighted indexes are not necessarily efficient, and even overvalued stocks can be held, so they cannot be theoretically correct investments.  Pension funds can fashion their own investment policy, so they may want to consider giving some purpose or message to the core portion of the investment.

Alternative investments are another option.  Although many pension funds may not be able to engage in alternative investments due to management difficulties and liquidity considerations, funds that have adopted them have achieved stable performance.  Also, management of alternative investments can be left to trust banks and gatekeepers once they reach the stage where continuous investment is possible.  Of course, as a fund, it is essential to monitor investments, but there is no need to manage everything yourself.  I believe that kind of shift in values will be necessary.

If you are incorporating active management or alternative investments, it is important to perform a risk factor breakdown to determine what and how much risk you are assuming across your portfolio.  This process will allow stress tests to simulate in detail the impact of geopolitical risks and climate change in the short-, medium-, and long-term.

Basically, pension fund management is a matter of drawing up a blueprint and then sitting back and letting the manager handle it instead of moving left and right with the market.  In order to construct the blueprint, you have to carefully assess which events and phases your current portfolio is vulnerable to.

Q.: In other words, it is necessary to review not only the product but also the investment policy and portfolio characteristics.

When we spoke to pension fund directors, they told us they have been unable to communicate directly with other pension funds for more than 2 years now due to the coronavirus, and that their opportunities to learn what other pension funds are doing with their investments have been drastically reduced.  Many of their interactions with managers are online, which this has led to a general decline in the substance and frequency of communication.  This means there are fewer new proposals, and operations tend to be centered on maintaining the status quo.

For the past 10 years, that may have been fine.  Preparing for shocks did not produce results; in fact, performance was better if we just managed passively.  Also, many managing directors and investment directors were replaced during this period of calm, and few of their successors experienced the global financial crisis.  But history always repeats itself and I believe now is the time to recall what we've learned from past trials and change our approach.
Q.: Finally, what is most exciting about your new organization, which resulted from the merger in December of Nomura Funds Research and Technology and Nomura Securities Fiduciary Management Department?
Ogishima: Previously, the fund research and asset management consulting departments were separated at the corporate level, but the new company has integrated those offices, allowing for more flexible collaboration.  To increase the value of our clients' portfolios, it is important to think from the same perspective, and not give partial advice.  We can now provide expert advice on funds and asset classes and provide consulting services that take a bird's-eye view of all assets, while leveraging our expertise in asset allocation.  Our new company name reflects our enhanced capabilities as we continue to serve our clients' asset management needs.

Seiji Ogishima

President & Representative Director
Nomura Fiduciary Research & Consulting Co., Ltd.

Seiji Ogishima has served in several important capacities at Nomura.  He was named President & Representative Director of Nomura Fiduciary Research & Consulting Co., Ltd. in December 2021.  Previously, he directed pension investment consulting services as Head of Fiduciary Management Department and Head of CIO Group from 2007-2021.  He headed the Investment Management Solution Group at Nomura Securities Financial and Economic Research Center from 2002-2007.  From 1991-1996, he was a quantitative analyst at Nomura Research Institute.

Mr. Ogishima is a Certified Member Analyst of the Securities Analysts Association of Japan (CMA).  He holds a master’s degree in engineering from Keio University, and has written several books on pension investments. 

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