When the pie stops growing

The head of a global asset-management business with a significant presence in Japan was asked what competitors he's looking out for. He didn't take long to think about it: "Sumitomo Trust & Banking is going to be a major player in the Asian market."

STB is already a market leader in Japan. Its trust division is the biggest manager of Japanese pension money, with ¥35 trillion ($398 billion) of assets under management.

Of this, ¥14.8 trillion ($164 billion) consists of segregated accounts. In this regard it is about to fall to second place behind the merged entity of BlackRock and Barclays Global Investors. BGI on its own was a close second, with ¥14.4 trillion, and the new BlackRock will manage ¥17.4 trillion ($196 billion) of corporate segregated accounts.

But STB is also in the process of merging with Chuo Mitsui Trust Group. And on October 1 this year it completed the purchase of a 98.55% stake in the $111.9 billion Nikko Asset Management from Citi. Once the Chuo Mitsui integration is complete, Sumitomo Trust & Banking's group AUM will hit ¥58 trillion ($659 billion).

Chuo Mitsui will provide STB with extra scale while the Nikko deal gives it a substantial retail mutual funds business, although the Nikko business is supposedly going to be run along independent lines.

The problem with being big is that growth is hard to find -- particularly when your core market, Japanese pensions, is flat. The pie is not growing and business is a zero-sum game, which means market leaders have the most to lose.

Trust banks, however, have enjoyed a rebound over the past year or so in Japan. Mitsubishi UFJ Trust & Banking and Mizuho Trust & Banking have also recorded gains, usually at the expense of foreign asset managers. Trust banks not just manage pension money but provide consulting services and custody. Many Japanese institutional investors got burned in 2008 on global equity and alternative products. As they have grown more conservative and biased toward domestic allocations, institutions have returned to using trust banks.

In addition, STB has positioned itself as a multi-product manager including to handles sub-advisory mandates to third parties for specific investment exposures. It was the first trust bank in Japan to farm out global products to third parties, and it now outsources around ¥1 trillion worth of mandates, including absolute-return products. It also manages active Japan equity strategies by itself, including long/short funds.

Japanese pension funds, despite the turmoil of the hedge funds industry over the past year, still crave absolute returns. Therefore STB has been developing a series of such products, this time using the expertise of the bank division's proprietary trading desk.

"The methods of our treasury department's trading works well with financial institutions such as regional banks," says Yukihiro Kitano, executive officer responsible for the asset management business. By creating products based on the banking side's prop activity, STB believes it can compete for market share at home as well as begin to provide access to Japan for global institutional investors that normally wouldn't be keen on traditional long-only equity funds. That effort is being led out of Hong Kong, where these prop-fund structures are being structured and managed.

Prop activity falls under Sumikazu Tsutsui, managing executive officer. Japanese banks' cross-shareholdings and huge property exposure as collateral for a loan are under pressure for major banks such as STB to manage risks of their balance sheets , with capital constantly shifting between risk assets and G3 sovereign bonds, depending on the environment.

For the time being, the biggest risk over the next few years is asset inflation. "We used to have the Greenspan put," Tsutsui says. "Now we have the global governments put. When markets collapse, now every government helps with the recovery, which increases the risk of asset bubbles."