Twenty-two money managers with U.S. parents have offices in Japan now, eager to cash in on opportunities expected from pension deregulation.
Four other U.S.-owned managers plan to open offices in Japan, according to a survey by Pensions & Investments, and still others are trying to figure out a way to get in on the action.
The P&I survey of U.S.-owned managers found sizable interest exists in the $1.4 trillion Japanese pension market. In the survey, 46 respondents expressed interest in marketing to this sector. And, 20 of the 46 report an aggregate of $40.6 billion under management from Japanese pension funds already. Not all of the U.S.-owned firms with Japanese pension assets under management now have an office in Japan.
And the assets under management by non-Japanese firms would be higher if U.S. firms with a foreign parent were included in the survey.
Today, the five U.S. organizations with the most Japanese pension assets under management operate as trust banks in Japan. As such, they could manage Japanese pension assets before deregulation began evolving in 1990.
But because of deregulation, investment advisers have gained a foothold - which should grow considerably in the years ahead.
Some already are faring well. For example, nine out of 10 of the Japanese pension assignments won by Boston-based Fidelity Investments have come in the last year, said Edward Madden, vice chairman, Fidelity Management Trust Co.
And, Boston-based United Asset Management, which markets in Japan on behalf of its 50 money management affiliates, also has seen a burst of interest in Japan lately. According to Senior Vice President George McClelland, four UAM affiliates - Rogge Global Partners Inc., Clay Finlay Inc., Acadian Asset Management and Provident Investment Counsel Inc. - expect to receive Japanese pension assets next year. The contract for one firm was signed in July; contract negotiations for the other three began in July, said Mr. McClelland.
Two UAM affiliates, including Acadian, already have assets under management from non-pension clients in Japan, and a number of other UAM affiliates expect to win such assignments by year's end, he said.
More opportunity ahead
And some observers see much more opportunity ahead in Japan for foreign, including U.S.-based, managers.
Craig Ueland, managing director-international operations at Frank Russell Co., Tacoma, Wash., estimates that during the next five years, Japanese funds might move the equivalent of several hundred billion U.S. dollars from trust banks and life insurance companies to new managers.
Investment advisers will be "well-placed" to receive sizable amounts of this money, he said.
Already, non-Japanese managers are benefiting from two major trends: on-going deregulation of Japan's huge pension market, which is the world's second largest, and the desire by Japanese pension sponsors to boost returns by investing more heavily abroad.
The latter is especially helpful to foreign firms. Given foreigners' perceived expertise in overseas investment, many Japanese pension sponsors prefer those firms to handle their non-Japanese investments.
Managers also see big new opportunities ahead in both the pension and non-pension arenas. Last year's drop to 2.5% in the guaranteed yield on insurers' general accounts prompted a number of Japanese funds, including the huge Pension Welfare Service Public Corp., called Nenpuku, to reduce or scrap allocations to these low-yielding portfolios.
Privatizations may boost business
Now, it appears other big allocations will be forthcoming. One example is the expected privatization of the $2.5 trillion Postal Savings, said Bill Hunt, principal in Japan with State Street Global Advisors and president of State Street Trust and Banking Ltd.
In fact, a number of "public entities are talking about privatizing or changing shape in some form," observes Catherine Hales, business manager-international operations, Japan Bankers Trust. That should sizably boost assets available to managers. To her, it means "a lot of the growth of the market is yet to come."
But the going is far from easy. Japan is renowned for its relationship-oriented business practices, and costs, language, customs and even pension regulations might seem daunting to foreigners. Getting business from Japanese pension sponsors can be a tedious, time-consuming practice. It can take years for foreign managers to become successful in Japan; and not even all of those eying or now participating in the market might be players in 10 years.
Not everyone will succeed
And even some of the 46 U.S.-owned firms that expressed interest in Japan's pension market might not succeed there, said Russell's Mr. Ueland.
Referring to P&I's survey results, he said he wouldn't expect that, over time, "more than 46" U.S.-owned firms would have "major success in Japan."
But the investment managers are giving it their best shot.
Late last year, Franklin Templeton Group established its Japan unit, Templeton Investment Management Co. Ltd. And in late February, it got approval from Japan's Ministry of Finance to operate as an investment advisory firm. It is now awaiting approval for a discretionary investment license that will allow it to manage money for institutional clients in Japan, said Mark Mobius, a director of Templeton Asset Management Ltd.
Templeton isn't a newcomer to Japan. Starting in the 1980s, several Japanese "securities firms sold foreign investment trusts managed by Templeton to the retail customer base in Japan," said Greg McGowan, executive vice president with Templeton International in Fort Lauderdale, Fla. Until the beginning of deregulation, foreign investment trusts "were the vehicle many overseas managers" used to "sell their services to the Japanese," he explained.
Templeton manages about $800 million of foreign investment trust money in Japan.
Global expertise should pay off
But now, opportunities appear much more expansive.
With Japanese bank deposit rates and local market conditions not that favorable right now, Mr. McGowan believes "there is a window of opportunity for those (foreigners) with global investment expertise to compete with local Japanese companies" for business.
"Not many pension funds or life insurance companies (in Japan) have tremendous sophistication and knowledge of global equities," he said. As a result, Mr. McGowan sees "one of the best times in a long time for companies like us to access" the market.
Although Templeton plans to address the Japanese market on its own, some other firms see benefits in partnering. Seventeen survey respondents said they plan to, or already do, market in Japan in partnership with a Japanese firm. Six of the 17 said they would like to market both by themselves and with a Japanese partner.
Boston's PanAgora Asset Management and Putnam Investments are subadvisers to Nissay Asset Management Co., a subsidiary of Nippon Life Group, based in Osaka, Japan. (PanAgora is 50% owned by the Nippon Life Group, and 50% owned by Lehman Brothers Inc. But it was announced last week that Putnam Investments has agreed to acquire Lehman's 50% stake in PanAgora.)
Partnering has 'clear advantages'
Bruce Clarke, PanAgora's chief executive, sees clear advantages in having such an arrangement in Japan. "Nippon is the largest pension fund manager in Japan," he said. Having a liaison with such a prominent Japanese company "gives us entree to a pension community that we would not get on our own."
To Mr. Clarke, name recognition is key in Japan. "If you were in there marketing in the late 1980s, your name is probably well-known and you could make a go of it now. But for those entering the market now, it would take too long to get needed name recognition." As a result, Mr. Clarke expects to see "many more joint ventures and cooperative agreements"between foreign and Japanese firms in Japan.