The Exchanges

Q Why don't we start with just your personal background in investing?

A I started my career right after my college degree with the Japanese Trust Bank. So I started with the sort of the retail banking service, and then I was sent to London as a young trainee during Japanese bubble economy. And it's a crazy time. And then I came back to Tokyo, and I did some of the cross-border aircraft lease financing, and then I went to Kellogg for MBA. And then after that, the Trust Bank That gave me a mission to study what they can do and what kind of investment or finance they can do in Silicon Valley. So I went to Silicon Valley, and again, during the tech bubble or the con-bubble time, and then I moved to their New York office to do some of the securitization investments and loan trading and a lot of those things because the Japanese bank rotate people inside of the organization. And then, um, after actually, nine, 11, I decided to do something different. So I received an offer from the private equity firm Kola Capital based in London. So I decided to move to London and work as a partner For that fund, more than a decade. And then, uh, six years ago, the Prime Minister Abe came back into his office for the second time, and he wanted to totally refurbish the pension management scheme of, uh, Japanese public pension funds. So, uh, I was invited and asked to come back home to run the GPI, Government Pension Investment Fund. After serving in that position for fiv…

AI assessment note: “I started my career right after my college degree with the Japanese Trust Bank.”

Q So if you look back now, as you stepped away over the last four years, and you've been bringing these ESG principles into this huge portfolio, when you add up all the impact, what does the GPIF portfolio look like on its, whatever it is, carbon footprint, or the things that you can measure?

A Well, the, uh, as, Sort of how much of the portfolio still managed possibly. We just cannot drastically reduce the carbon footprint in the portfolio. Rather, I actually refuse to actually compete for less carbon footprint from the GPR portfolio, because we can easily reduce the carbon footprint that the global portfolio by divesting some particular, like a carbon heavy industry. But, given our universal ownership approach, it doesn't make any difference, because when we, let's say, when we sell the carbon heavy industry, or like, you know, maybe divesting coal, or divesting tobacco, or whatever the divestment strategy some other ESG investor take, I don't criticize for them doing it, because they have on their own strategy, but from universal ownership, like a perspective, or like following our philosophy, it sounds like We are passing ownership of those problematic business to the people who don't care about it. We don't want it to reduce the carbon footprint by divesting carbon heavy industry because it doesn't reduce the carbon footprint of the world anyway. So, uh, instead, GPL started reporting in compliance via TCFD Task Force for Climate Financial Disclosure, and I call it a litmus test because GPL has one of the most sizable and most globally diversified portfolio. So the carbon analysis of the GPL portfolio is actually the analysis of the global situation. We just cann…

AI assessment note: “came up with a conclusion that our portfolio on the path of the, uh, three degree”

Q And what was that conversation like of how much to own of Japanese equities and fixed income versus international? I mean, now I know you ended up half and half, but there's always a home country bias. How did you think about that in terms of the global economy?

A Well, the home country bias is a tough one for several reasons, because it's not as simple as like, you know, whether we should have the allocation reflecting global market caps, which basically like, you know, Japanese equity, you know, the stock market probably represent like the five, six percent now. That's actually has a lot of different aspects to consider. Like one is the other currency risk, because the 100% of our liability was in Japanese yen. So the taking currency risk, which is academically proven that before the long term is a zero sum gain, but the short term volatility is really high. So the taking or responding to the foreign currency is actually the tough one for the people like, you know, this for the public pension fund CIO like myself. And then also, this is a difficult one because this one, even among the professionals, there's mixed opinion about the home country buyers. And as I said earlier, the one of the kind of fate, the CIO, the CEO of the public pension fund have to accept this, as I said, it's not only about the financial optimization, but we just need to make sure our consistency would support it. So, reducing the Japanese stock allocation requires a lot of, like, hard work to actually explaining to Japanese constituency, including political leaders.

AI assessment note: “home country bias is a tough one for several reasons, because it's not as simple”

Q to talk mostly with the time we have left about the core and your approach to sustainable investing related to that. But before we do that, even at just 10% of 1.5 trillion, you're at one hundred and fifty billion of assets managed actively. So that's still one of the largest pools in the world. How did you go about that process of the active component of what you're doing?

A No, several things we did, and we, Well, regulated not to take the equity management in-house, but actually I made a conscious decision. GPF should focus on how to optimize the, or like create the mutually beneficial partnership with the active managers. So, uh, I introduced several new initiatives, which is basically just to achieve that. The one is, we always have a big debate with the active asset managers, I guess, you know, about our fee level. Because they continue to complain the GPF fee is too low, but from my perspective, almost a 20 years of GPF, the active experience using the active managers, and if you look at the list of our active managers, you name them, they are all brand names, right? So the, the GPF's brand name active managers portfolio delivered zero ultra net of fee. Over almost 20 years of GPF history. So I concluded, I mean, you guys keep complaining about the RFP is too low, but if the net of fee, you know, as a group, you don't deliver anything additional to the passive portfolio, and then I wonder how you can just complain that RFP is too low. I don't have a wallet to just pay you, so if you want me to pay more, just shift to the performance-based fee arrangement. So, uh, GPF basically proposed that all the acting managers change their fee structure to, uh, almost fully a performance-based fee. With the, uh, the low base fee, which is the, as much as …

AI assessment note: “GPF should focus on how to optimize the... partnership with the active managers.”

Q As you're investing in managers and trying to nudge them in the direction of integrating ESG and measuring their externalities, how did you view the impact those managers were having on the businesses that they're investing in?

A Well, I think that's increasing. You know, the, uh, passive manager used to be just a silent investor. I now serve on the several corporate boards, and I heard a lot, like, you know, the passive manager used to be very easy ones, because they actually either just follow the ISS and address this type of the proxy voting advisors, advisors, advisors, but now they actually have their own, they seem to have their own opinion. And they actually tend to hold the, uh, actually much more voting power compared to the active houses. So, uh, their impact or influence on the corporate executive has drastically increased. And now what I'm saying is, as your influence increases, the more responsible you have to become.

AI assessment note: “their impact or influence on the corporate executive has drastically increased.”

Q Now you talked about the core of your efforts, really owning the global economies and global markets, and doing what you could to improve their performance. So at what point in time did that turn into this notion of sustainability?

A When I analyzed the long-term performance of the big asset owners, as I said earlier, I concluded whatever we do, our performance is mostly dictated by global economy or global capital market we invest in. So, uh, we just thought rather than trying to beat the market, that's the kind of the conventional, like a traditional, the way to evaluate the art performance or like after the manager's performance. Rather, we should contribute to make the whole capital market more sustainable. So we just came up with the other concept of universal ownership. That's a concept which actually written by the some of the financial academics many, many years ago, but according to Howard Watson, GPS probably the first one trying to bring it into their practice. So we basically just said we are owner of the unique capital market universe. So we are universal owner. So our job is not to be the universe because we cannot. So, uh, let's see. What we can do to make that universe better. And then, as you asked me, the sustainability concept came in to that concept, because once we started looking at how to make this capital market better, we need to think about what's the, uh, foundation of the capital market. And, uh, the foundation of the capital market is basically it's a society and the economic activity of private sector. And then also the policy maker as they are also the debt issuer.

AI assessment note: “sustainability concept came in to that concept, because once we started looking at how”

Q So when you look at that assessment, which is pretty sobering, certainly from the climate lens, what kind of conversations did you have both at GPIF and then with other sort of giant asset owners around the world about how to make a dent in that problem?

A Well, I think climate change and some other like sustainability risk and then the, uh, or inclusiveness risk as well, like gender diversity or other diversities, which is becoming the hot topic in the U.S. now. I think there's, The building up sort of like a consensus, my long-term investor, particularly big asset owners, we need to proactively approach those issues to make our portfolio sustainable. So, uh, I actually sense that the more and more asset owner is agreeing to our philosophy. So, uh, universal ownership philosophies, which when I started using like five years ago, nobody was using it, but now I hear universal ownership or universal investor vocabulary everywhere when the big people like helpers talk about their strategy and some others as well. So I just sense that the, uh, timing is maturing for us to make a very clear statement as an asset owner, as a guardian long-term capital or retirement benefit. So just before I left, we came up with the idea of like the asset owner letter jointly signed by other big asset owners to basically send a message to the world, both to the asset managers and also the other portfolio companies, what we expect from them. But what is the most important aspect of that particular letter, which is available in the GPF and the CalSTRS and the U.S.'s website, I guess, is now signed by more than the dozens of the asset owners. Have one new…

AI assessment note: “we came up with the idea of like the asset owner letter jointly signed”

Q So before we get into that piece of the journey, just to set the table, where did some of those key kind of the asset allocation come out when you arrived?

A I was a member of the trustee board at that time when the other, you know, GPI made a decision to change the asset allocation from the mostly Japanese government bond to half equity portfolio. So, uh, as a matter of fact, I was a part of that decision making, but, um, what I thought was, first of all, that the decision was welcomed by investment professional and the financial industry, because they actually thought the sleeping lion, that's what they call GPI, But that's why it's now waking up and they may actually create a lot of business for the financing, financial industry. So our decision was received by the financial industry with a lot of enthusiasm. But on the other hand, we received a lot of criticism from the general media. And the opposition parties. And I think that affected the people's view on GPIF. Particularly on my arrival, they thought the GPIF is going into the very aggressive direction that put the Japanese people's precious pension funds in a gamble. By investing more in the risk assets. So, uh, it is a difficult time. First of all, you know, the, uh, managing the public pension fund, we just cannot manage this with the ideological approach. We just need to make sure our constituency would accept it. So, uh, that's one thing, including GPF, a lot of public pension fund managers struggle. It's different from one country or one continent to another. But takin…

AI assessment note: “change the asset allocation from the mostly Japanese government bond to half equity portfolio”

Q Okay, how about anything on the investment side that really annoys you?

A I really cannot live with the sort of Kind of a hypocritism, or like, I actually always struggled with the gap between what they talk and what they do. I actually observed throughout my time at the GPF, there's a lot of inconsistency in the, the practice of what we do. So, uh, that's something. And then the other thing, oh, finally, we are now seeing the very hot stock market, and again, we are actually deploying all the financial, monetary, and the fiscal policy to ease pain. And when I was at the GPF, the people asked me about my view on the quantitative easing and monetary policy by central banks. I always told them if I allow to be very selfish, I will like the other, all the central banks to continue to bring the money to make my job easier as a CIO, because after the inflation is kind of made my job easy, but I feel so, so Guilty because we are basically doing it by borrowing from future generations. And that's what we did during the, uh, the Lehman crisis. We really struggled to bring it back to normal, and then we got the, another pandemic hitting the market, and we are repeating it again. So, uh, I'm just feeling so guilty that this is a painkiller in a way, which is necessary, because when we are suffering from the untouchable pain, we need a painkiller. But the point is, there was a lot of painkiller to actually recover from Lehman crisis, and, uh, before we bring it…

AI assessment note: “I actually always struggled with the gap between what they talk and what they do.”

Q On both of those sides, you mentioned analysis and decision-making. And particularly on the active side, how did you figure out what you wanted to kind of measure or look at to make sure that these managers were integrating ESG principles?

A Well, it's not easy because even the asset managers don't know sometimes how they do it. And so we started this way. First year when we say we are going to do that, we basically ask the asset managers how you guys do it. So basically we tick boxes when they say we do this this way. We don't score them or differentiate their score on those because GPS has to build the expertise and also they get the confidence to score different approaches differently. But when I started doing that kind of thing, I received that question very often. Do you know how to measure it? And I said, Hey, come on. Nobody did it in the past, so I don't know either. So we need to test it. So, uh, people have to build enough knowledge base to do that. And then I don't really ask GPF's team to do it immediately because it doesn't make any sense because they don't know either. So, uh, the very Funny story. I mean, the way I remember from the, one of the, um, probably one of the most controversial meeting I had when I was a CIO with the then incumbent asset managers, and that we announced that we are going to score their stewardship activities in the future, and one of the asset managers, you know, the big asset managers, the head of the stewardship team, asked me a question. How do I measure their stewardship activities? So I actually asked him a question. How are your stewardship vaccines evaluated in your o…

AI assessment note: “we basically ask the asset managers how you guys do it. So basically we tick boxes”

Q So you show up and this is roughly one and a half trillion dollar pool of capital. How do you think about how to manage such a large pool?

A I understood the basics of the how to manage a portfolio, and I grew up in the finance all through my career. I knew all the basics of the portfolio, modern portfolio theory, and the different asset classes, but, um, first thing I had to do on my arrival was to analyze what we have to do differently, because all the conventional wisdom of the portfolio management Didn't actually help me to better manage this massive portfolio, because all the conventional wisdom of the portfolio theory is basically either taking it for granted, or it's just a takeaway of what's happening in the market, or like just trying to be better off than the others by shifting the portfolio. And given the size of the GPA at 1.6 trillion dollars, I just felt that what I had learned throughout my career You can finance and asset management. Didn't really help me to do a better management.

AI assessment note: “first thing I had to do on my arrival was to analyze what we have to do differently”

Q How did you think about influencing the capital markets and economy with your fixed income investments?

A Fixed income is a very interesting one because it's easier to beat the benchmark. The fixed income compared to the, uh, stock market, there's much more consistent Alpha generation. It's probably just the outcome of the easy to beat the, the market benchmark used by the asset owner like DPI. So that we had a much higher active portfolio. And then, um, when we started promoting the ESG four years ago, I asked my team that the, why we don't do, you know, they ask the same from the fixed income managers. At that time, people are very skeptical about the ESG integration in fixed income portfolio for several reasons. One is, it's just not done thing, but very few are professional asset management companies talking about the ESG in a fixed income at that time. And the second is, this is what the Mark Carney called tragedy of a horizon. He used a tragedy of horizon to describe a bank loan, which he was regulating, has their bank loans term is too short to seriously take the climate risk into their pricing, so that he called it a tragedy of horizon because the financier Maybe continue to finance until the time it becomes too late. And I always thought it's much more difficult to make the fixed income investor realize the other things like a climate change risk, because there's an investment horizon issue. But in the equity market, they shouldn't exist, right? Because the price of today'…

AI assessment note: “when we started promoting the ESG four years ago, I asked my team”