The Japanese propensity for piling up savings is the stuff of financial servicers’ dreams. For 40 years after the war, the Japanese maintained one of the highest savings rates on earth, and these savings were recycled into booming industries through an ingenious government-directed plumbing system of financial institutions which, although not by any means a truly capitalist market, did deliver the national goods – social stability and steady export-based economic growth.
This legendary ability to amass huge pools of savings – by individuals under their futons and in postal savings accounts, and by corporations through employee pension funds – is unquestioned. The ability of corporate Japan to deliver adequate financial, as opposed to societal, returns on these savings is not. Broad social and market shifts since the mid 1980s have led to sweeping changes in the way the Japanese savers, and their financial system, handle retirement assets.
All of this has created what looks to be a money manager’s dream – a large pool of inefficiently managed capital operating in a grotesquely low interest rate environment supporting the impending retirements of an aging population in an increasingly internationalized and deregulated economy. Dream or illusion?
Why link up at all?
The Japanese asset management business has been composed of four types of entity:
-life insurance companies, such as Nippon Life, which typically offer pension assets a guaranteed fixed rate of return;
-investment advisory companies (IAC’s) – specialist portfolio managers which may be independent or owned by a bank, trust company, or securities firm – there are some 150 of these in Japan;
-trust banks (Shintaku); and
-City (money center) banks
These domestic players hold many key cards including institutional relationships, marketing organizations, national brand name recognition, the ability to navigate the regulatory system, and the clout that comes with years of knowing which corporate and political closets hold which skeletons. These cards are absolutely necessary to make inroads into that long-insular market – at least the old economy version.
What they have always felt lacking, however, is a track record in asset classes which are opening up to Japanese institutions, such as international equity, private equity, venture capital, and derivatives. They also lack expertise in top-down asset/liability matching, asset allocation for large pension funds, the development and management of investment policies and guidelines, and the software and systems to support US-style portfolio management. These are precisely the cards Japanese firms hope to add through strategic partnerships with western institutions.
For their part, western institutions seem to hold the missing cards – or at least the ones their Japanese partners seek: portfolio management techniques and technology, time-tested products already accepted by institutions around the world, international name recognition, substantial assets under management and, perhaps most importantly, the revenue streams needed to underwrite the laborious and expensive market development needed in Japan. In return, they hope for institutional access, business referrals, marketing help, input on product design, shortening of their marketing cycles, and reduction of uncertainty in developing a steady client base in Japan, not to mention international management from well-heeled institutional partners with itchy assets.
This let’s swap market access for technology and expertise model seems to have crystallized in 1996-97, when several fund management alliances were announced once financial services liberalization had begun in earnest in 1995.
Among these alliances were:
-a partnership between the then-still-solvent LTCB’s Limco investment advisory subsidiary and Swiss Bank’s Brinson Partners unit;
-an equity investment by Nippon Life’s Nissay Asset Management in Lehman’s PanAgora Asset Management (Boston’s Putnam Investments, a 1973 entrant into the Tokyo market, which had its own alliance with Nippon Life, later bought out Lehman’s PanAgora stake);
-an equity investment by Mitsubishi Trust in 30 percent of AIG’s investment advisory company;
-investment advisory agreements between Sumitomo Life Insurance and Sumitomo Trust & Banking with Gartmore Investments;
-a 10 percent stake taken by Gartmore in Nippon Credit’s investment advisory company; and
-the well-known venture between Nikko Securities and Wells Fargo, later consolidated into Barclays Global Investors.
Beyond these alliances, Japanese and foreign players were making their way on their own. This group included US giants Fidelity, Goldman Sachs, Morgan Stanley Asset Management, and Japanese blue-blood IBJ NW Asset Management. They seem to have determined that they could rely on their impeccable international reputations to attract clients, on locally-hired executives to service clients, and on imported technology and management from their other international offices to manage portfolios.
What has happened since then?
The line-up above neatly shows the wisdom then-conventional in both Japan and the US. This might be paraphrased as follows: ‘Retail investors will buy more mutual funds through bank branches and insurance companies – they will want international funds with higher yields than postal saving accounts, and these funds will be managed by foreign managers with great retail reputations. Pension funds will buy more international equities, and they will do so in portfolios managed using systems and techniques familiar to the New York staff of foreign joint venture partners.’
Such was the market in 1996-8 and so it largely remains – at least for institutions. For Japanese pensions to grow while beating the long-term Yen interest rates and the guaranteed returns to pensions from life insurance company funds, remains as easy as shooting fish in a barrel. Yet, success stories are not conspicuous. According to a leading UK analyst of Japanese securities, ‘It is still far too early to tell which if any of these alliances will succeed,’ though it must be noted that Japanese institutional asset management fees are, at 10-12 basis points, a fraction of the fees paid by US pension funds for comparable services. Japanese retail funds pay fees of 50-60 basis points, around half of US mutual fund rates. Obviously only the most ruthlessly efficient foreign competitor, used to fatter fees, will find a way to eke out a living. The others will find ocean yachting (‘standing under a cold shower tearing up $100 bills’) a pleasant alternative to conducting business from a fully-staffed office in Tokyo.
A cynic predicts that the high cost of doing business in Tokyo, combined with Japanese institutions’ ability to ‘give away’ the fancy services of their international joint ventures to old domestic customers who do other compensating business, will catch up with the foreign partners who will have already transferred to their Japanese partners the technology they sought in the first place.
The sheer top-down organizational paralysis resulting from large mergers cannot help. Another jaded observer goes on to predict, only half-jokingly, the final amalgamation of the Bank of Tokyo-Daiwa-Tokai-Fuji-Asahi-Sanwa-DKB-IBJ-Sakura, which will change its name to Softbank and announce that it needs no foreign partners after all, as it will be spending the next ten years deciding on a new logo, consolidating branches, and waiting for 2,000 redundant managers to retire. All that will be needed at that point is someone to merge-purge the portfolio management systems and translate the user manuals left behind by the fleeing gaijin asset managers.
But what has happened in the retail market is actually even more startling. Enter the ‘new economy’. Over the past two years, US retail investors discovered how to handle self-directed defined-contribution plans and how to do it online through internet brokers who sell stocks and thousands of mutual funds. At the same time, the New York Stock Exchange woke up to find Nasdaq-Amex being funnel-fed millions of online trades daily. For the Japanese retail investor, a funny thing is likely to happen. He is going to open an online account at E*Trade Japan and buy some shares listed on Nasdaq (or its new offspring Nasdaq Japan), both of which are ventures not of the old guard in Japanese finance, but of Softbank.
This fantastic success, fueled by profits from an early investment in Yahoo and other internet incubations, is to many observers, the most interesting story. Softbank, through its ‘new economy’ vision, near monopoly on innovative financial services internet ventures in Japan, and sheer bankroll (market cap larger than old economy pillars Sony or Toyota Motors) is in a position to disintermediate the foreign partners they so eagerly sought three years ago, by bringing into Japan the web-based financial technology which revolutionized US markets.
However the details work out, Japanese funds and retail investors will find themselves investing more overseas, and expecting their Japanese assets to sweat harder. As they invest in overseas equities, foreign issuers will have to develop IR programs for the growing numbers of Japanese investors. This exposure to international standards of transparency and shareholder value will also heighten investors’ demands for more management efficiency in their Japanese corporates. Management not meeting these expectations will need more than old fashioned stonewalling or new-fashioned glossy IR, as the Japanese market for takeovers and corporate control contests livens up. They will need to create and release value to their shareholders, and to communicate actively and frequently with their shareholders before a raider gets to them first.
