Japan’s GPIF Seeks to Boost Excess Returns by Resuming Foreign Stock Lending

In a move it hopes will boost excess returns, Japan’s $1.5 trillion Government Pension Investment Fund has decided to resume foreign stock lending, more than four years after ending the practice due to transparency and “empty voting” concerns.

The GPIF put an end to stock lending in 2019 because it worried the practice would clash with its stewardship responsibilities. The problem was that transparency limitations with foreign stock lending meant the sovereign wealth fund could not be certain who the final borrower was. It also wanted to avoid the possibility of what is known as “empty voting,” when an investor borrows shares and uses them to vote at a company’s general meeting.

The criticism against empty voting is that it provides investors with the ability to influence a company’s decisions without having a financial stake in the company. The problem for the GPIF was that if it did not know who was voting at company meetings, then it would not know their intent. It therefore could not guarantee that their lending would not inadvertently contradict their stewardship principles.

But in its decision to resume foreign stock lending, the GPIF is implementing countermeasures with the aim of preventing—or at least minimizing—the possibility of empty voting. The GPIF also hinted that it was experiencing a bit of “FOMO,” as it noted that many pension funds outside Japan use stock lending to acquire excess returns.

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“The economic profit obtained from stock lending exclusively for the benefit of the insured is one of the sources of excess income,” the GPIF stated in its announcement. “However, consideration should be given to the lending ratio. Furthermore, from the perspective of increasing long-term investment returns, we will exercise caution in exercising voting rights.”

The new measures taken by the GPIF include requiring foreign stock-lending agents to have a physical structure; to agree to conditions such as being able to respond to recalls of loaned stocks; and to make efforts to avoid stock borrowing for the purpose of exercising voting rights. The pension fund also intends to monitor the overall picture of each fund that conducts foreign stock lending, the lending status of each stock, the status of accepted collateral and the status of the exercise of voting rights.

“With regard to lending, we aim to balance the acquisition of lending profits with stewardship responsibilities,” the GPIF stated. “In addition to efforts to ensure transparency, efforts are being made to require reporting of transactions to regulatory authorities in Europe and the United States.”

Despite its change in policy regarding foreign stock lending, the GPIF stated in its announcement it has no intention to conduct domestic stock lending.