Unusual Manager Defies Peers in $870 Billion Pension World (1)

(Bloomberg) -- In the $870 billion world of Japan Inc. employee pension funds, he’s known as the unusual idealist who’s long danced to his own tune.

Hiroichi Yagi filled the Secom Corporate Pension Fund with stocks when his peers hid in bonds, considering it his duty to support Japanese equities. He embraced environmental, social and governance investing as a way to reduce volatility. And he signed Japan’s stewardship code for institutional investors right at the start, making Secom the only corporate pension fund outside of financial firms to accept the voluntary standards.

“It was the natural thing to do,” the mild-mannered 65-year-old said in an interview in Tokyo. Soon “others will follow.”

Company pension funds have become the problem children of Prime Minister Shinzo Abe’s corporate governance overhaul. As other investors vow to press executives to run their businesses better, this group is drawing criticism for refusing to get on board.

Read: Can Japan Make Its Companies Care About Shareholders?: QuickTake

Japan has more than 19,000 corporate pension plans, according to the Pension Fund Association. They collectively manage more than $870 billion in assets, a bigger pool than most of the world’s largest sovereign wealth funds.

The conservative investors -- companies themselves -- are reluctant to tell other firms what to do, Yagi said. But if they signed the stewardship code, they’d have little choice. They’d have to disclose everything from how they guide management to how they vote at shareholder meetings.

And that can be awkward. For example, they might have to vote against the reelection of the president of an affiliated company or key business partner.

Two Decades

Yagi, who’s worked at the security company’s fund for more than 20 years and led it for half that time, found a way around that conflict. Secom basically doesn’t hold such stocks. But he said other corporate pension heads, who generally stay in the role for three to five years, don’t have time to develop their own styles.

Yagi started breaking from the pack as he sought to protect Secom from recurring financial shocks, from the Asian crisis in 1997 to the global meltdown of 2008. First, he sold equities to avoid losses, but then he decided he wasn’t going to flee to bonds.

“What on earth does it mean if listed companies’ pension funds shun the Japanese stock market?” he said. “It’s a massive contradiction. They’re strangling themselves.”

The hesitation among pension funds to pile into stocks underscores a continuing conservatism that marks much of Japan’s corporate culture. Despite an historically strong stretch of growth in recent quarters, data released Tuesday showed companies boosted their stockpile of cash to a record 255 trillion yen at the end of March.

Close to half Secom’s 90.3 billion yen is in equities, mostly Japanese shares, Yagi said. That’s about twice the level of peers, according to a survey of about 100 public and corporate pension funds by Rating & Investment Information Inc. Virtually all Secom’s domestic stock holdings are actively managed.

To make it safe to buy more shares, Yagi needed to insulate his fund from crises.

After experimenting with standard investing styles, including growth and value, he turned to ESG investing. Yagi instructed his external money managers to pick well-governed companies, betting they’d bounce back faster from downturns. He said academics are still debating whether ESG investing reduces risk, but Secom’s two main ESG funds outperformed the benchmark stock gauge with lower volatility over the past five years. (It’s difficult to compare Secom’s returns with other corporate pension funds because the funds don’t disclose this information.)

Yagi, who stepped down from the lead role at the fund last September and now has an advisory position, started ESG investing the week after the March 2011 Fukushima earthquake. It now accounts for more than 95 percent of Secom’s Japanese equity holdings. The main ESG funds hold fewer than 30 stocks, which Yagi declined to identify, but he said they prefer firms that pay good dividends.

Some commentators are skeptical.

“Most pension fund directors in Japan think the Secom way is quite unusual,” said Sadayuki Horie, a senior researcher at Nomura Research Institute and former high-ranking official at Japan’s $1.3 trillion Government Pension Investment Fund. “Yagi-san’s fund is a rarity.”

More than three years since the introduction of the stewardship code, Horie said most corporate pension funds don’t see Yagi as an example to follow. One big fund needs to sign up for others to do the same, he said.

Aeon Co., Japan’s biggest publicly traded employer, is still gathering information on the code, a spokeswoman said. Panasonic Corp., which has more than 250,000 staff, is considering its response, said spokeswoman Kyoko Ishii. Omron Corp., which has won awards for corporate governance, said it’s considering signing up.

Horie of Nomura Research Institute agreed that Japan Inc.’s pension funds are reluctant to be active stewards, but said that’s a feature of corporate pensions the world over. Japanese funds’ aversion to stocks makes sense, he said, because 98 percent of them are overfunded.

Others are not so charitable.

“The only way you can explain this behavior pattern is to say that, let’s face it, senior executives don’t want active proxy voting and engagement in the market,” said Nicholas Benes, the Tokyo-based head of the Board Director Training Institute of Japan. He said they fear “blowback” at their own shareholder meetings. Judging by their actions, “they care more about that than they do about their employees’ funds,” he said.

Asked whether it’s difficult to stand out in conformist Japan, Yagi said “doing the same as everyone else is riskier.” Plus, he’s too busy trying to convince others to change their ways to even notice, he said.

There are signs Secom won’t be the lone signatory much longer. A government-led report earlier this year urged corporate pension funds to accept the code.

“I really don’t know why they don’t sign up,” Yagi said.

(Updates with data on companies’ cash holdings in 11th paragraph.)

To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net, Nao Sano in Tokyo at nsano3@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond, Sarah McDonald

©2017 Bloomberg L.P.