Taking the Long View: The Dangers of Short-Termism

Hiro Mizuno (GPIF)

• Manages 1.3 trillion USD in assets for the Japanese Government Pension Investment Fund (GPIF), a mandatory social security scheme for all Japanese citizens.
• Sets a real return objective of 1.7% to sustain the defined benefit plan over a 100-year horizon.
• Adopts a policy asset mix of 50% equity (25% domestic, 25% non-domestic) and 50% fixed income (35% Japanese, 15% non-Japanese).
• Notes that current fixed income yields are near zero or negative due to Japanese and European government bonds, placing the burden of returns on equity volatility.
• Critiques the industry's obsession with quarterly reporting, arguing it creates a mismatch between the fund's 10-decade mandate and media/public pressure for short-term transparency.
• Plans to release a strict shareholder proxy voting guideline for U.S. companies to align with global governance standards.
• Announces a new mandate for passive managers to become "aggressively passive," requiring them to engage in corporate governance and active stewardship despite low fees.
• Prioritizes alignment of interest with asset managers by urging performance-based fees and the adoption of "clawback" provisions common in private equity but rare in public markets.

Chris Ailman (CalSTRS)

• Advocates for a long-term investment horizon, comparing a 10-decade mandate to a marathon where focusing on "pace per mile" or "first foot" is counterproductive.
• Reports that the board met 54 times in a year due to having five separate boards, but is reducing meetings to allow more time for deep manager due diligence.
• Successfully convinced a board to invest in a manager with a terrible three-year track record, prioritizing a proven value-based strategy over short-term underperformance.
• Confirms that CalSTRS holds activist managers with an average holding period of 3–5 years, contrasting this with short-term traders.
• Estimates that in-house management costs one-tenth the price of external public market managers and 25 times cheaper than private market alternatives.
• Argues that the U.S. public pension model is stuck in a 1970s governmental structure, unlike Canadian or European funds that operate as external investment management companies.
• Endorses the "2 in 20" fee structure as broken for funds of their size, calling for lower base fees and stronger clawbacks on total partnership performance.

Vicki Fuller (New York State CFO)

• Manages a plan with a 7% nominal return assumption, noting that the geometric return required is 6.5% with a 50% probability of missing the target.
• Identified a "dearth of talent" as a critical barrier to meeting return targets, necessitating the hiring of 35–50 additional investment professionals over the next decade.
• Currently employs 275 investment professionals for $250 billion in assets, placing the fund in the bottom quartile of the top 50 U.S. plans regarding human capital density.
• Emphasizes that the state's sole trustee and legislative approval process creates friction in securing necessary funding for competitive compensation and talent acquisition.
• Highlights the irony that public pension staff salaries come directly from fund fees, meaning low pay directly impacts the ability to secure alpha.
• Reports that the current internal management model allows for the retention of internal management of 90% of the U.S. book ($50 billion) and all fixed income (26%).

Scott Evans (New York City CEO)

• Sets a conservative 7% nominal return objective, noting it is higher than European (2–3%) and private fund (4–5%) assumptions but manageable due to a 30-year actuarial smoothing horizon.
• Implements a six-year asset smoothing mechanism for accounting, though GASB 67/68 rules now require marking assets to market, increasing the volatility of reported funding ratios.
• Reports investment performance monthly to the board, a practice that inadvertently reinforces short-termism and pressures external managers to focus on quarterly results.
• States that the New York City board is exploring removing hedge funds from their portfolio and expressing dissatisfaction with the value proposition of private real estate fees.
• Confirms the ability to run a $160 billion public index fund in NYC for under 2 basis points, contrasting this with the significant fees paid for active and alternative management.
• Warns that without a "square deal" and better fee alignment in private markets, public pension plans may be forced to exit alternative asset classes.

Industry Trends and Strategic Shifts

• Short-termism: A consensus exists that asset owners reinforce short-term behavior in corporations by demanding frequent, quarterly transparency, which pressures asset managers to act as short-term traders.
• Corporate Governance: A joint initiative is proposed between GPIF and CalSTRS to improve corporate governance in Japan, where passive ownership often leads to a "governance chasm" due to a lack of active engagement.
• Passive Management Redefined: The panel argues for a shift from "passive management" to "permanent ownership," where passive managers are expected to engage with the 2,000 listed Japanese companies despite low fee structures.
• Compensation Models: There is a strong move toward decoupling base fees from performance, advocating for "gain sharing" on true excess returns and the removal of legacy management fees for firms operating for decades.
• Fee Structure Reform: The 2% management fee / 20% performance fee model is widely criticized as outdated for large funds, with calls for negotiated lower fees and clawbacks on underperformance across the total partnership, not just individual investments.
• Structural Evolution: The panel suggests U.S. public pensions must transition from governmental entities to quasi-commercial investment management companies (like TIAA or CPPIB) to compete for talent and implement modern compensation structures.

Disagreements and Challenges

• Transparency vs. Strategy: A tension exists between the necessity of transparency for accountability and the detrimental effect of frequent reporting on long-term investment strategy execution.
• Fee vs. Value: While all agree fees are high, there is a nuanced debate on whether "lower fees" equals "better value," with the consensus that high-quality talent requires competitive, market-rate compensation rather than government-subsidized pay scales.
• Active vs. Passive Engagement: Hiro Mizuno argues that purely passive investors must become "aggressively passive" to drive market efficiency, whereas others note the structural difficulty of engaging with thousands of companies without internal resources.