In Japan, BNY Mellon weighs options without BGI

Last week's announcement by BlackRock that it was acquiring Barclays Global Investors has led to plenty of headlines about what the deal means. What hasn't been considered is where this leaves the other known bidder, Bank of New York Mellon.

Had BNY Mellon won the BGI business, it would have transformed itself into a huge custody bank with a very big passive and quant business, alongside an existing suite of boutique asset managers such as Newton and Blackfriars. In other words, a bigger, badder version of State Street.

'Tis not to be. But BNY Mellon continues to look to grow its asset management business in Asia-Pacific. It has notched some successes in the region, such as a sub-advisory mandate to China Southern Fund Management's 2007 QDII fund.

Its biggest success has been in Japan, where in February it won not one, but two mandates from the $1.5 trillion Government Pension Investment Fund. Moreover these were equity mandates.

"That is a huge compliment," says the Tokyo head of a major US-based fund house.

The firm is in a position to become an important provider in Japan's market, one of the few that may be able to break into the cosy circle of major institutions managing Japanese assets -- even without BGI. Although its size on the ground remains modest, it has recently moved into tony digs in the historic Meiji Seimei Kan building in Hibiya, with a view overlooking the park grounds of the Imperial Palace.

David Jiang, Tokyo-based CEO for Asia-Pacific at BNY Mellon Asset Management, says the firm continues to look to grow its business in Japan (and regionally) via organic growth as well as other acquisitions.

"The asset management industry in Japan is open and growing," he says, despite the slowing of the Japanese economy and its demographic problems. "It will grow in the long run. We want to invest in asset management."

In Japan specifically, he says the firm needs to hire more people to help build relationships with distributors of funds and to expand its domestic investment capability.

At present the firm sources around $13 billion from Japan (versus BlackRock's $50 billion), of which 15% is retail (via securities companies, not direct). Almost all of these sales go to global products. Locally, the firm has a Japanese equity quant product and a team for funds of funds.

Jiang intends to develop distribution relationships with mega banks and regional banks. He is bullish on the long-term development of the Japanese retail market. It is understandable why the market has shrunk after a burst of activity in 2005-06, given a long history of poor performance. The investor base is generally risk averse. This means dividend products will remain important.

A second area Jiang is targeting is financial institutions -- banks and insurance companies. Here there has been a weeding out, with the more aggressive players having gotten burnt in the markets and the conservative firms emerging with cash intact and looking to buy into new businesses. "We see the healthier ones looking for investment opportunities in US government programmes," he says, such as the Treasury's Public/Private Investment Program or Talf, for asset-backed securities.

The third target market is pensions, especially public ones, where there is a growing trend of diversifying overseas. Jiang says large pension funds from Japan have been among the first to step back into the market following the turmoil of late 2008. More mutual aid societies and local government pension funds, if they are young, are adopting longer time horizons and can seek greater risks, from overseas and alternative exposures.