Pensions & Investments | Foreign money managers make big push for business in Tokyo

By May 16, 2016June 7th, 2016In The News

Foreign money managers are opening sales and client service offices in Japan this year, anticipating growing offshore allocations from local asset owners as hopes for Abenomics fade.

New business opportunities might be the carrot luring foreign firms to Tokyo, but some industry executives contend there’s a stick as well: rising client service demands from Japanese institutional investors.

Japanese asset owners are becoming much more actively involved with “oversight and analysis of their portfolios in separate account structures offshore,” leaving managers without a local presence at a disadvantage, said Paul Adkins, managing director with Highland Capital Management Singapore Pte. Ltd., which opened a Tokyo office in September.

Meanwhile, the Bank of Japan’s successive attempts to buoy the domestic economy — including, most recently, the introduction of negative interest rates in January — have left Japanese pension funds and insurance companies increasingly looking overseas for the low-volatility target returns of 3% to 4% they need to cover their liabilities, said Mr. Adkins.

The growing ranks of institutional investors in Japan looking to take on more risk and increase their investments overseas makes the country “an interesting market for us” now, concurred Marcel de Bruijckere, Singapore-based director of institutional business, Asia-Pacific, with M&G Investments.

On April 26, London-based M&G Investments announced it had opened an office in Tokyo, to be led by Taro Shiroyama, previously the head of PIMCO Japan’s Tokyo product and solutions team.

That same day, Edinburgh-based Standard Life Investments announced that it, too, had opened a new office in Tokyo, after receiving an investment advisory and agency license from Japanese regulators in mid-April.

In an interview, Neil Slater, CEO and representative director of SLI’s Tokyo office, said the flip side of the daunting challenges facing Japan’s economy now, such as a shrinking workforce, will be “wonderful opportunities to support Japanese clients … over the next 20 to 30 years,” he said.

As a company with an insurance company parent, Standard Life Investments sees potential opportunities to serve insurance clients in Japan at this “really interesting period for the market,” with 40-year government bonds offering yields as low as 35 basis points, Mr. Slater noted.

The list of managers looking to plant their flag in Tokyo to pursue those growing opportunities could continue to expand this year.

In a May 6 interview, Roger Bartley, vice chairman-investments with Legal & General Investment Management, a London-based money manager with £757 billion pounds ($1.106 trillion) in AUM, said he’s currently interviewing candidates for a “head of Japan” role, with an office opening in Tokyo possible by year’s end.

Mr. Bartley said LGIM’s immediate focus will be to help facilitate the increasing move into offshore assets by Japanese insurance companies and banks, where the firm’s experience in actively managed credit, real estate, infrastructure and multiasset-class strategies could leave it well positioned to grow.

A Greenwich Associates survey of Japanese asset owners showed that while insurers and banks accounted for only 10.4% of a ¥182 trillion pie of externally managed assets in 2015, they’ve been boosting the outsourced portion of their general account and balance sheet assets significantly in recent years, said Taeko Sumiyoshi, the consulting firm’s Tokyo-based business development strategist.

Of the almost ¥500 trillion in combined assets for the roughly 50 financial institutions Greenwich surveyed, the portion outsourced to external managers rose steadily over the four years through 2015: from 1.38%, to 1.7%, to 3.04%, to 3.84%. The BOJ’s adoption of a negative interest rate policy at the start of 2016 could further accelerate that trend this year, said Ms. Sumiyoshi.

Meanwhile, institutional investors’ growing focus on risk management is raising the opportunity costs of not having boots on the ground in Tokyo, some managers and consultants say.

Japanese investors are seeking more interaction with risk managers associated with their overseas accounts, especially those involved with the mitigation of portfolio volatility, said Highland Capital’s Mr. Adkins.

Such trends prompted Axioma Inc., a New York-based provider of risk management and portfolio construction solutions with offices in Singapore and Hong Kong for the past decade, to open a Tokyo office as well last month, said Olivier d’Assier, the firm’s Asia-Pacific managing director.

Demand from institutional money managers and asset owners could make Japan Axioma’s biggest market in the region within three or four years, from one of its smallest today, predicted Mr. d’Assier.

But to build aggressively on its current lineup of 10 clients in Japan, “we need to be local” — something existing clients have called for, and a precondition for working with Japan’s big public pension funds, which in turn would open doors to a wider range of clients in the country, Mr. d’Assier said.

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