SMBC celebrates Nikko acquisition with fund launch

Oct 5, 2009

The SMBC Nikko New World bond and equity funds replicate a structure created by Nomura and are sub-advised by Goldman Sachs Asset Management and Edmond de Rothschild.

Japan has seen its fair share of mergers among financial groups, and it is customary for these to celebrate their integration by launching a new mutual fund. This month witnesses such a debut, following Sumitomo Mitsui Banking Corporation's $7.9 billion acquisition of Nikko Cordial Securities from Citi in May.

Sumitomo Mitsui Asset Management (SMAM) is marketing a pair of funds that are being distributed by both SMBC and Nikko Cordial, marrying one of Japan's biggest commercial banks with its second-biggest securities firm. This has the potential to create a powerful distribution machine in the Japanese retail space, combining the stability and stickiness of banking customers with the fast-paced, high-flying clientele of a brokerage.

SMAM is raising money for the SMBC Nikko New World duo of funds, both international, one for fixed income and the other for equity. SMAM has mandated Goldman Sachs Asset Management (for bonds) and Banque Privee de Edmond de Rothschild Asset Management (for equities) as its sub-advisors.

The structure follows a model created by arch-rival Nomura Group at the start of the year. Nomura issued three funds, virtually identical, investing in US high-yield bonds, with different share classes for hedging. Investors could hedge back into yen, or into exotic, high-powered currencies including Brazilian real, Turkish lira and Australian dollar.

Nomura Asset Management ran two of the funds and mandated JP Morgan Asset Management to sub-advise a third, but the structures were similar, with most funds raised through Nomura Securities. The three funds eventually raised $10 billion.

This led to other houses issuing similar products, and SMBC Nikko is no different, but it hopes to revive the model, which has flagged in the second half of the year. According to one person involved in the launch, SMAM is hoping to raise up to $3 billion in total. The funds' initial marketing period concludes at the end of this month.

The GSAM sub-advised bond fund invests in global sovereign debt and credit, denominated in US dollars and then hedged into five share classes: yen, Australian dollars, Brazilian real, South African rand and -- the product's big twist -- Chinese renminbi. Last month, the portfolio of bonds yielded 7.9% on paper, and if these currencies continue to perform well, the product could yield as much as 16% on an annualised basis. The total management fee is 1.74%.

The Edmond de Rothschild sub-advised equity fund focuses on global equities, about 60% from developed markets and 40% from emerging markets. It is packaged as a set of seven themes (water, agriculture and so on) and comes in just two share classes: hedged (into yen) or unhedged (in US dollars). The total management fee is 1.9%.