Japanese corporate pension funds are moving money into global equity mandates to offset the poor returns in their domestic investment markets, and several U.S.-based money managers have been winning the contests for these dollars.
Among the Japanese funds are KDDI Corp., AISIN Corp., Sony Corp., Zensharen, Daiichi Life Insurance Co., Toyo Ink Group, The National Association of Commercial Broadcasters, East Japan Stationary Sales and NEC Corp., all in Tokyo, and Omron Corp., Kyoto.
The $1.2 billion KDDI fund has 23% of its assets in global equity investments, according to Hiroyuki Aikawa, investment officer. The U.S.-based managers it uses are Capital Group, Los Angeles, which manages a $45 million core mandate; Bank of Ireland Asset Management, Greenwich, Conn., $45 million with a value tilt; Brandes Investment Partners LP, San Diego, $40 million with a value tilt; and Morgan Stanley Asset Management, New York, which runs a $20 million global core mandate.
The fund also uses three U.S.-based small-cap managers, Acadian Asset Management and MFS Investment Management, both of Boston, and Merrill Lynch Investment Management, New York, for a combined $30 million in global mandates, and two non-Japanese emerging market equity managers, Capital Group and Baring Asset Management, London, which run a combined $20 million.
Mr. Aikawa said KDDI uses global, not international, managers for its overseas diversification because the "global mandate includes Japan and (the) international mandate does not," and he wants managers to be able to invest in the strongest companies in different sectors. As an example, he mentioned the auto industry, pointing out the sector includes General Motors Corp., BMW AG and Toyota Motor Corp. "If the global manager says Toyota is the strongest stock, we wouldn't want to say, `Oh, you are not allowed to invest in Japanese equities,' " Mr. Aikawa said via e-mail.
AISIN's pension fund has 17.5% of its assets in global equity mandates, according to Takeshi Ito, portfolio manager at the $1.2 billion fund. Overall, it has 32% in global investments, including 12.5% in global bonds and 2% in global alternative investments.
The fund changed its manager structure for global equities in 2001 and shifted its emphasis from defined-style and region-specific management to global investment, said Mr. Ito. "This reflects the change from a comparison within countries to comparison within sectors/industries for stock selection," he said.
All but one of AISIN's global equities managers are based in the United States. State Street Global Advisors, Boston, manages a passive portfolio; Bank of Ireland Asset Management manages a portfolio with a value tilt; and Alliance Capital Management, New York, manages a portfolio with a growth tilt. Wellington Management Co. LLP, Boston, and Merrill Lynch Investment Managers, New York, manage core global equity portfolios. Mitsui Asset Trust, Tokyo, is the sole manager based in Japan.
For global bonds, AISIN uses a partial hedge to minimize currency risk. The fund started a small portfolio of core-plus global bond investments about 18 months ago. "This is quite new to us and includes mortgage-backed and asset-backed securities, high-yield bonds and emerging market bonds," said Mr. Ito. The managers include Merrill Lynch and Wellington, along with Tokyo money managers Mitsui, Nissay Asset Management and Sompo Japan Asset Management.
For its alternative investments, the fund selected Analytic Investors Inc., Los Angeles, for a market-neutral mandate; Salomon Smith Barney Inc., New York, for a capital structure arbitrage mandate and Financial Risk Management Ltd., London, for a fund of hedge funds mandate.
"There's been a definite shift to interest in investing globally," said Denis Curran, chief executive officer of Bank of Ireland Asset Management. The firm now has 15 clients in Japan, he said, with $1.5 billion under management, most of which it won in the past 12 months.
Change in thinking
Shunichi Minami, a senior investment professional with UBS Global Asset Management in Tokyo, said global investing by Japanese pension funds has taken off because of the poor returns in the Japanese domestic markets and the change in thinking by Japanese pension fund sponsors from regional investing to sector investing.
Mr. Minami said UBS' global sector approach to investing fits very well with this idea. "The right approach is to pick winning companies in each sector from the global equity universe," he said.
UBS has slightly more than 100 clients, with about $20 billion under management in Japan, he said.
Brandes has a joint venture in Japan with American International Group, New York. But Brandes closed its global equity investment strategy to new business worldwide last April when it reached $55 billion. "We felt we had reached our capacity; we wanted to be able to service our clients," said a source at the firm who asked not to be identified.
Japanese pension funds "are looking more carefully at how they should allocate assets," because of their unfunded liabilities and low domestic market returns, according to Paul Klug, head of Morgan Stanley's Japan unit.
The trend is "less emphasis on regional mandates and more emphasis on global investing," said Mr. Klug. In addition, he said that in their new defined contribution plans, Japanese plan sponsors also are considering offering global investing as a style, because of their "fiduciary responsibility" to offer several investment options to plan participants.