Asia the key for Japanese asset managers

A recent report published by Nomura Research Institute (NRI) argues that Japan’s asset managers cannot compete without a serious investment capability in Asia ex-Japan equities and fixed income.

The report, written by analyst Atsuo Urakabe, notes that, on aggregate, mandates from overseas institutional investors account for 15% of Japanese asset managers’ total AUM – mainly running Japanese equity mandates for US and European pension funds.

However, only 1% of total AUM comes from institutions out of markets other than North America and Western Europe, a figure that has been stagnant for years.

“Japanese asset management companies appear to have had little if any success to date in expanding their business by capturing asset inflows from investors in emerging Asia ex-Japan countries,” says the report.

Given that a few Japanese firms have extensive Asia business, such as Nikko Asset Management, the percentage of non-Japan clientele is actually even less for most firms. If 1% is the average international non-US/Europe level of AUM, then most of the domestic behemoths, notably the trust banks, have little-to-no such business.

This is now a worry, argues NRI, because of the growing size of the Asia ex-Japan market, which means Japan’s relative weighting in equity and bond market caps is diminishing. NRI argues that the lion’s share of business is won by indigenous firms, but in equities, Japan’s weight in Asia-Pacific is already down to 40%.

“If Japanese asset management companies manage only domestic equity and bond portfolios, they will have difficulty meeting investor needs, including demand for emerging-market asset management,” says the report.

“Companies that limit their operations to domestic asset management and allocate vast resources to the domestic market will have difficulty expanding their businesses.”

Japanese firms need to realise that their main competitors are aggressive players from China, Korea and India – the Mirae Asset, China AMC and Reliance Capitals of this world, NRI says.

All of this reminds AsianInvestor of its October 2007 cover story about Japanese asset managers beginning to voyage overseas, spurred by the stagnation in the domestic pensions market – and how little has changed since. If anything, matters have deteriorated, because the retail funds business in mid-2007 was still robust in Japan.

For most Japanese firms, particularly the giant trust banks, little has been achieved overseas, while only Nomura Asset Management and, more spectacularly, Nikko Asset Management, can comfortably claim they have succeeded.

It is notable that Nomura is an outsider in the world of Japanese finance, as it is not part of a local keiretsu, while Nikko has been utterly transformed into a global company with Japanese characteristics.

There are some success stories among ‘local’ companies: Tokio Marine Asset Management’s international arm has become a recognised leader in Asia ex-Japan equities, for example. (It has also gone against the grain by hiring senior executives from outside its parent companies.)

But what should alarm Japanese financiers and government officials is the threat to Japanese asset managers’ overall business if NRI is correct in saying that a purely domestic operation is no longer sustainable.