Foreign investment advisory companies are seeing the bright glow of opportunity in Japan.
That glow is fueled by a dismal domestic securities market, barely visible bond yields and a long history of pension program underfunding by corporations still living on memories of a better time when they could routinely count on double-digit growth.
Such domestic investment underperformance has thrown the door to Japan Inc. wide open for foreign asset managers, leading to a point at which even Japanese pension fund sponsors with little foreign experience or knowledge are ready to expose their assets to the international market, say foreign managers.
One of the companies to embrace foreign investing most enthusiastically is Honda Motor Co. Ltd., Tokyo, which has invested almost half of its 582 billion yen ($4.6 billion) in pension assets outside Japan and is happy with its results.
"Total return on assets under management at foreign firms in fiscal 1997 . . . was 41.7%," said Katsuhiko Ikeda, executive director of the Honda Employees' Pension Fund. "That compares with a return of 0.9% on assets managed by domestic firms."
The fund's foreign managers include: Goldman, Sachs & Co., New York; Fidelity Investments, Boston; Schroder Capital International, New York; Scudder Kemper Investments Inc., New York; J.P. Morgan & Co. Inc., New York; and Dresdner Kleinwort Benson Securities, London.
"Our allocation mix as of June, implemented under a strategic advisory contract with Goldman Sachs Asset Management, is 18% domestic equities, 16% domestic fixed income, 30% international equities, 17% international fixed income," Mr. Ikeda said. "We allocated 12% to our general account, and hired a global tactical asset allocation manager as a trial, with a 5% mandate."
In April when the fund changed its management structure, Honda became the first corporate pension fund in Japan to employ a transition manager, he said.
Foreign investment advisers got a foot in the door in 1990, when employee benefit plans -- one of the two main forms of private corporate pensions, and which hold about $450 billion in total assets -- were authorized to give limited mandates to them.
Total Japanese pension assets amounted to $3.34 trillion as of March, according to Nobuyuki Uwamori at Tokyo investment advisory firm Curuby & Co.
Another breakthrough for investment advisory firms came in April 1996, when they got access to the main pool of assets in the public pension scheme -- roughly equivalent to the U.S. Social Security system -- estimated by Mr. Uwamori at $1.85 trillion.
With 130 billion yen in assets, the Tokyo Taxi Companies Employees Pension Fund as little as a year ago was having trouble meeting the mandated 5.5% return on investment. In October 1997, the fund assigned 33% of its assets to foreign asset management, and in one year saw that money return 50%, boosting its overall return to 9.54%, second-best among all 1,800 EBPs in Japan.
"We are extremely pleased," said Hideo Suzuki, investment managing director for the fund. "Before we made that move, we studied very carefully the experiences of public employee pension funds in New York and California, and we became aware of the need for exposure to a global investment environment if we wanted to put our fund on a stable basis."
The fund declined to identify its foreign asset manager.
As deregulation of asset management for private and public EBPs in Japan has proceeded, a growing number of funds have enjoyed similar success with mandates to foreign managers, and in foreign securities.
"As of March, foreign investment advisory companies were managing 4.9 trillion yen worth of mandates from Japanese pension programs, 1.9 trillion yen more than a year earlier," said Hiroshi Nakagawa, president, Japan Financial Strategies Inc., Tokyo. "Foreign companies held 30% of the investment advisory business, up 5% on the year."
Principals at foreign firms in Tokyo are bullish on their prospects.
"Growth in the allocation of pension assets to managers other than the traditional life insurers and trust banks continues to be fast," said Clifford Shaw, president, Merrill Lynch Mercury Asset Management Japan Ltd. "It has gone from zero to 14% since Japan began deregulating this sector in 1990. And within that growth it is the foreign companies that are taking an increasingly big share, mainly on the strength of performance."
Mr. Shaw has seen the explosive growth of foreign asset managers in Japan first hand; he headed the Mercury team in Tokyo before the firm's merger with Merrill Lynch.
"We have added $3 billion to our Japanese pension assets under management this year," he said. "And the prospects for more growth to come look good."
For one thing, Mr. Nakagawa said, foreign managers are increasingly finding favor with private pension funds. "In the same year through March, asset mandates to foreign managers from private funds grew 77%, against 57% growth in mandates from public funds."
One reason behind that, he said, is the start of deregulation of the other major type of private pension program in Japan. Tax-qualified pension funds are similar to EBPs but are typically found at smaller companies. Employer contributions for both are fully tax deductible; employee contributions are fully deductible for EBPs and deductible within limits for TQPFs.
"While deregulation of EBPs was virtually completed as of March, the process was still just beginning for TQPFs, which have about 22 trillion yen in assets," Mr. Nakagawa said.
Naturally enough, internationally oriented Japanese blue-chip manufacturers were the first to respond to presentations by foreign asset managers when deregulation of Japan's pension industry got under way. Hitachi Ltd., Tokyo, was among the earliest firms freed from the now-defunct 5-3-3-2 straitjacket, and immediately allocated a good-sized chunk of its 900 billion yen in assets to the global market -- with good results.
"We recorded a 10.9% return on assets in fiscal 1997," said Hiroshi Maruta, manager, asset management group at Hitachi. "Since August 1996, our basic asset mix has been steady at 35% in Japanese equities, 30% in foreign equities and 30% in Japanese fixed-income instruments."
The company has mandates with five foreign fund managers -- J.P. Morgan; Merrill Lynch Mercury Asset Management; Schroder; Fidelity; and AMVESCAP PLC, Atlanta -- and 24 Japanese life insurers and trust banks.
"Returns are good from all of them, but admittedly a little better from the mandates with foreign managers, especially those in equities," he said.
Two of Hitachi's mandates with foreign fund managers are for specialist investment strategies; three are in balanced strategies based on the MSCI International index. That contrasts with the allocation of pension assets by Honda, which has a strong weighting toward specialist strategies. Eight of the 22 fund managers with mandates from Honda's pension program are foreign investment advisory firms, and they handle 30% of the company's 582 billion yen in pension assets.
At Fujitsu Ltd., Tokyo, the emphasis is solely on specialist mandates for equity investments, both foreign, which account for 25% of the pension fund's 550 billion yen in total assets, and domestic, 45%. Fujitsu scored a 7.5% return on assets under management in the year through March, compared with 3.5% a year earlier, said Takahisa Tanaka, executive director, pension fund of Fujitsu. Fujitsu has assigned mandates to 10 foreign asset management firms, but declined to identify them.
This movement toward specialist mandates reflects both the growing influence of major international consulting companies and the increased presence of American asset managers, according to Mr. Shaw of Merrill Lynch Mercury.
"For various reasons, British investment advisory companies at one time dominated the field here with an emphasis on balanced strategies, but U.S. companies are now very active and they tend to offer specialist expertise," he said. "Most of our early clients opted for balanced strategies, but are now asking us to add specialist strategies to their allocation mixes."
Staff in the Tokyo office of UBS Brinson agrees. "Our client base is mostly in balanced mandates, and will remain so," said George C. Olcott, deputy president, "but we have seen a significant shift to specialist mandates in our new business."
Another trend in the Japanese pension market is toward partnerships between foreign and domestic asset managers. "Although most foreign managers are still independent," Mr. Olcott said, "there has been a run of tie-ups recently -- Dresdner Kleinwort Benson with Meiji Life Insurance, Putnam with Nippon Life, Alliance Capital with Sumitomo Trust -- which has changed the competitive landscape of the industry."
He would not say how much Japanese pension money the firm manages.
Foreign investment advisers in Japan also are hoping their performance records for Japanese pension programs will help them attract individual assets here. Merrill Lynch Mercury, UBS Brinson and other foreign firms are eagerly awaiting Dec. 1, when Japanese banks and other financial institutions will be authorized to distribute investment trusts -- the Japanese equivalent of mutual funds.
"Sixty percent of an estimated 1,200 trillion yen (about $10 trillion) in individual assets in Japan are now sitting in very low-yield deposit accounts," Mr. Shaw said. "There is potential for huge earnings growth if even a trickle of that cash went to foreign asset managers."