Nikko Asset Management builds on advances at home to target overseas clients

Nikko Asset Management's goal of becoming more relevant to overseas investors remains a work in progress, but the Tokyo-based manager's domestic business has been picking up steam, the firm's top executive said.

In recent years, the “real game-changer (for Nikko's business) has been our success with Japanese financial institutions,” including regional banks, insurance companies and trust banks, said CEO Takumi Shibata in a March 29 interview.

As of Dec. 31, Nikko was actively managing ¥4.4 trillion ($39.6 billion), or 22% of the firm's ¥19.93 trillion in total assets for local institutional investors. That was up from ¥3 trillion, or 15% of the total, at the close of the March 31, 2015, fiscal year, a spokeswoman said. She declined to provide net inflow figures.

The recent growth of Nikko's domestic business has been driven, in part, by institutional investor efforts to seek alternatives to investing in benchmark Japanese government bonds yielding next to nothing now, said Mr. Shibata. (In Tokyo trading on April 10, JGBs were yielding 5.2 basis points.)

But it also reflects the firm's willingness to anticipate the needs of clients, and invest in the capabilities required to meet those needs, he said.

As an example, Mr. Shibata pointed to Nikko's three-year effort to develop a database of 500 Tokyo Stock Exchange first-section-listed companies offering the greatest scope for value creation through engagement on environmental, social and governance-related issues.

Likewise, the challenges facing Japanese institutional investors now appear to be hastening their embrace of other recent business initiatives, such as the global credit team of roughly 20 portfolio managers and analysts the firm assembled in London and other financial centers over the past two years, he said.

The Bank of Japan's negative interest rate policy at the start of 2016 has left clients more open to product innovation and less insistent on lengthy track records, said Mr. Shibata, citing the Danish covered bond strategy Nikko launched in May 2016 as an example. In a little under a year, that strategy has attracted roughly ¥175 billion from Japanese institutions, he said.

Mr. Shibata's bullish view on the domestic front comes as Nikko — which under his predecessors expanded its global reach through acquisitions in Australia and Singapore — suffered a setback overseas.

On March 31, Suncorp Group Ltd., the Sydney-based financial conglomerate that sold its A$25 billion ($19 billion) money management arm to Nikko six years ago, announced a further diversification of managers for its assets under management. The announcement thanked Nikko for its “hard work and commitment.”

Officials at Suncorp and Nikko declined to offer details, or comment on reports that Suncorp's move would effectively shift billions of dollars of assets from Nikko to other managers.

In an email, Mr. Shibata called the drop in Nikko's Australian AUM “planned for and the result of a long-term and clearly communicated” change in investment strategy by one of the firm's clients.

As of Dec. 31, Nikko's actively managed AUM for institutional clients outside of Japan accounted for roughly 16% of the firm's overall AUM, down from 25% as of March 31, 2015. Australian clients accounted for roughly half of that Dec. 31 figure, or 8% of total assets.

While it's “still too early to say we are very successful overseas,” Nikko's commitment to global growth remains “core to our strategy,” said Mr. Shibata.

For the three segments of Nikko's domestic business, by contrast, Mr. Shibata said he's either very satisfied or reasonably satisfied now.

Nikko's retail fund business, with roughly 40% of overall AUM at the end of December, remains the firm's “bread and butter,” and an important source of revenues for investment in new areas, said Mr. Shibata. New products, such as the ¥525 billion global robotics fund Nikko launched in August 2015, have done well, he said.

On the institutional side, business on behalf of Japan's regional banks has been a “great success” for the firm over the past year or two, while the third segment — major financial institutions including insurance companies and giants such as the ¥2 trillion Japan Post Bank and the ¥1.4 trillion Government Pension Investment Fund — has enjoyed a “reasonable degree of success,” he said.

Mr. Shibata said the firm continues to pursue a “barbell” strategy, aimed at offering high-conviction alpha capabilities at one end of the spectrum and passive, mostly exchange-traded fund strategies at the other end.

The “middle space” populated by closet indexers is disappearing, he noted.

As of Dec. 31, Nikko's ETF business, with average management fees in excess of 10 basis points, accounted for roughly 21% of the firm's overall AUM.

Mr. Shibata said Nikko has no interest in offering the kind of passive index strategies that have garnered as little as one basis point in fees from institutional clients in recent years, preferring instead strategies offering more opportunity to add value.

On that score, he cited an evolving debate in Japan on the topic of ESG-focused investments, being spearheaded by the GPIF, as one area in the realm of passive management in which Nikko is positioning itself to compete.

GPIF has concluded that a “very proactive value creation exercise in the form of engagement” by managers of the fund's ¥25 trillion in passive domestic equity allocations is the key to raising market valuations at home, noted Mr. Shibata.

However, some managers are saying that at current fee levels, they can only engage with maybe 150 companies.

“Our approach is different,” he said. Nikko began three years ago producing a database of 500 large-cap companies listed on the first section of the Tokyo Stock Exchange, selected on the basis of “ESG (criteria), with a view to direct contacts with the companies (aimed at) creating shareholder value,” he said.

The company was guided by the belief that in order to add value, the database needed a “sufficient number of companies, in this case 500, and for a sufficiently long period, in this case three years,” said Mr. Shibata, adding “we'll be marketing this very soon.”

Mr. Shibata said Nikko's database effort wasn't a direct response to the RFP that GPIF issued March 13, calling for managers of stewardship-focused passive strategies to register with the fund.

The investment business demands that managers anticipate what clients are going to need, and with Japan's government introducing corporate governance and stewardship codes in recent years, and a new GPIF management focusing on engagement, “to me it was obvious … that the world would require such a product,” Mr. Shibata said.

Whether it's the ESG database or the global equities team Nikko acquired in August 2014 from Scottish Widows Investment Partnership, which is only now approaching the three-year track record institutional clients demand, the logic of a number of bets Nikko has made is about to be tested this year, said Mr. Shibata.

“My reputation is on the line. We are very incentivized to make it a success,” he said.