In 2015, Prudential Investment Management Japan Co. Ltd., the Tokyo-based arm of PGIM Inc., had net inflows of more than $10 billion, and that momentum has continued this year, said Yasuhisa Nitta, president and CEO of the Japanese operation, in a Nov. 17 interview.
While the Japan unit's insurance company parent continues to account for the bulk of its roughly $190 billion in assets under management at present, assets from third-party clients have surged to $40 billion from $2 billion in 2007, he noted.
Analysts say local financial institutions account for a big chunk of that demand.
Rock-bottom yields on Japanese government bonds have left banks and insurance companies under pressure to outsource management of their assets, a trend that picked up steam after the Bank of Japan adopted a negative interest rate policy at the start of 2016, said Taeko Sumiyoshi, a Tokyo-based managing director and business development strategist with Greenwich Associates Japan KK.
Japanese banks need credit exposure to cover the big gap between their deposits and loans, and with Japan's credit segment so narrow they need to look to foreign markets for that exposure, agreed Mr. Nitta.
Japan Post Bank - the country's biggest, with a ¥204 trillion ($1.91 trillion) investment portfolio - has been the elephant in that room.
On Nov. 14, the bank announced its third-quarter results, which showed a continued investment portfolio shift into foreign bonds from Japanese government bonds. At quarter's end, the weight of JGBs in its portfolio dropped to 37.7% from 45.3% and 57.4% over the previous 12 and 24 months, respectively. Picking up some of that slack, the bank's exposure to foreign bonds rose to 23.3% from 20% a year before and 13.4% as of Sept. 30, 2014. At present, a one-percentage-point shift amounts to ¥2 trillion, or roughly $18 billion.
The bank, which listed its shares on the Tokyo stock exchange in 2015, has increasingly turned to external managers as it built its investment team over the past year or two, noted Mr. West.
A Japan Post Bank spokesman declined to say how much the bank has allocated to external managers.
Greenwich Associate's latest survey of Japanese asset owners, conducted between April and June, pointed to continued growth in demand for external managers, noted Ms. Sumiyoshi. Roughly half of the 71 banks and insurance companies surveyed listed actively managed international fixed income as an asset class they expected to significantly increase allocations to over the coming three years, while roughly a quarter listed actively managed domestic fixed income as a target for reduced allocations.
PGI's Mr. West likewise predicted the fundamental trends driving Japanese financial institutions to invest overseas should persist for the coming year. With the Bank of Japan committed, for now, to keeping the yield on the 10-year JGB at zero, and with the yield on 10-year U.S. Treasuries likely to push toward 3% by the end of 2017, there should be “more rather than less opportunities” for global money managers over the next year, he said.
Meanwhile, Prudential's Mr. Nitta said his firm's investment capabilities in areas such as credit have helped it win big pension fund mandates as well, among them publicly announced allocations from the country's biggest funds, including the ¥129.7 trillion Government Pension Investment Fund, Tokyo, and the ¥21 trillion Pension Fund Association for Local Government Officials, Tokyo.
Other global managers have enjoyed strong inflows as well, with Neuberger Berman's Japan office AUM jumping to $23 billion from $15 billion in 2016, and the local units of Invesco Ltd. and Pacific Investment Management Co. garnering more than $10 billion each in net flows, predominantly bonds, industry observers say.
Executives at those firms could not be reached for comment.