Nomura uses changes in policy to prepare for uncertain markets
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December 11, 2017 12:00 AM

Nomura uses changes in policy to prepare for uncertain markets

Douglas Appell
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    Kunio Watanabe said all aspects of Nomura's now-diversified business are growing.

    Nomura Asset Management Co. diversified its business over a five-year period marked by significant policy change in Japan, leaving the firm better positioned to cope with an uncertain market environment, its CEO said.

    "We have a Japanese retail business base, we have exchange-traded funds, we have domestic institutional mandates, we have a reasonably big international business, and each of them is growing," said Kunio Watanabe, the Tokyo-based firm's president and chief executive, in a recent interview.

    That diversification — at a moment when it's hard to predict what the coming decade will bring — "is our strength," he added.

    Moves by the government and related entities in recent years — from the Bank of Japan's growing purchases of equity ETFs in an effort to boost market liquidity, to the ¥156.8 trillion ($1.4 trillion) Government Pension Investment Fund's shift into risk assets have offered Nomura ETF- and institutional-related opportunities, Mr. Watanabe said.

    Meanwhile, with the government gearing up to promote the kind of individual retirement vehicles that buoyed the U.S. market over the past 30 years, there's even reason to hope savers in Japan will follow suit by putting more of their money in stocks and ​ bonds. That outcome could boost Nomura's retail business even as the country's population enters a period of significant declines in coming decades, he said.

    Roughly 35% of Nomura's $450 billion in assets under management is managed on behalf of retail investors, with another 26% in ETFs and 39% in institutional accounts. Of that institutional business, 25% is domestic and 14% is international.

    As recently as five years ago, Nomura was much more of a retail house. As of March 31, 2013 — a year before Mr. Watanabe took the helm — the firm's business was 56% retail, 9% ETFs and 34% institutional, split 22% domestic and 12% international.

    Despite a challenging environment facing a retail market in Japan where the typical account holder is close to 70 years old, Mr. Watanabe said the recent rebalancing of Nomura Asset Management's business reflected relatively strong growth for the firm's ETF and institutional businesses rather than a decline in retail.

    Mr. Watanabe said that demographic challenge — with almost ¥55.74 trillion in financial assets being bequeathed to the next generation every year — makes it imperative for Nomura Asset Management to build connections to younger individual savers now.

    One possibility: approaching those younger savers directly, as Fidelity does, rather than through distributors, including with fintech solutions where accounts can be opened and decisions on investments made using smart phones. Mr. Watanabe said Nomura executives are studying those options, but he declined to predict when they could be launched.

    Changes in government policy over the roughly five years since Shinzo Abe began a second stint as prime minister, pledging to do whatever it takes to revitalize Japan's long-struggling economy, set the stage for the firm's rebalancing.

    Fastest-growing segment

    Mr. Watanabe said ETFs have been the fastest growing segment of Nomura's business in recent years. And while ETFs are a relatively low-margin product, strong growth in demand for the investment vehicle has allowed the business to generate considerable revenue, he said.

    Demand from the Bank of Japan is the rocket fuel powering the growth of the ETF market now, but "I believe (interest in ETFs) as an investment instrument … will grow," and with strength there, Nomura Asset Management can be confident of thriving whether active or passive strategies are in favor at any given time, said Mr. Watanabe.

    The Bank of Japan, which began buying Japanese market equity ETFs in 2010, has ramped up its purchases since 2016 to more than ¥5.5 trillion annually, and the central bank's accumulated holdings of roughly ¥16.6 trillion account for more than 60% of the value of Japan's more than ¥27.5 trillion ETF market.

    Nomura Asset Management's share of Japan's ETF market is 45%, said Mr. Watanabe.

    When it comes to the firm's domestic institutional business, Mr. Watanabe said the GPIF looms large, both in terms of the opportunities its shift into risk assets since late 2014 has offered and the higher governance standards the pension giant is establishing for the asset managers it works with.

    From "a business point of view, we need to chase the whale," as the GPIF probably accounts for 50% of Japan's domestic institutional market, said Mr. Watanabe.

    The Tokyo-based pension fund "is asking us to strengthen our governance," and setting high hurdles when it comes to how managers engage with the companies in which they invest on environmental, social and governance-related issues, he said.

    The GPIF is looking to improve market beta by working to improve each portfolio company's performance, an effort Nomura Asset Management's relatively large research team leaves the firm well placed to pursue, said Mr. Watanabe.

    Meanwhile, the GPIF is looking to introduce more "incentive-driven fee structures" soon, which could prove attractive "if we perform well," he said.

    Five mandates for Nomura

    According to the GPIF's annual report for the fiscal year ended March 31, Nomura was managing five mandates with combined assets of ¥3.85 trillion, or more than 2.5% of the pension fund's ¥144.9 trillion portfolio.

    Those mandates included ¥1.5 trillion for the firm's Tokyo-based smart beta team in a RAFI strategy and ¥129 billion for Nomura's New York-based, $25 billion high-yield bond boutique, Nomura Corporate Research and Asset Management.

    Roughly five years earlier, as of March 31, 2013, Nomura had combined GPIF mandates of ¥900 billion, or less than 1% of the pension fund's portfolio.

    On the outlook for Japan's retail market, Mr. Watanabe professed optimism, even as he concedes perennial predictions of Japanese savers tiring of keeping their savings in low yielding bank accounts and turning more to stock and bond funds have never panned out.

    "I've been working for this industry more than 30 years," and that savings to investment story hasn't happened, Mr. Watanabe conceded.

    But this time could be different, he said, as the government and regulators, such as Nobuchika Mori, the commissioner of Japan's market regulator, the Financial Services Agency, seem much more determined to support the growth of areas such as defined contribution plans and independent retirement accounts.

    Thirty years ago, with U.S. savers putting the same 5% to 6% of their savings in mutual funds that Japanese savers currently do, U.S. regulators introduced IRAs and DC programs, resulting in a big shift of funds into capital markets, and American savers have benefited from that move over the past few decades, Mr. Watanabe said.

    Japan, meanwhile, is now expanding programs like the Nippon individual savings account, or NISA, introduced four years ago, with the next iteration — designed to encourage regular monthly contributions — set to launch in 2018, said Mr. Watanabe.

    Annual, tax-advantaged contributions for that coming version of NISA are capped at less than $4,000, but similar programs in the U.K. started off small only to be expanded along the way, he said.

    Matter of great importance

    Most Japanese people don't have any experience investing successfully, and providing that kind of experience, especially for younger Japanese, is a matter of great importance for the industry, said Mr. Watanabe.

    Finally, he pointed to the 41% minority stake Nomura acquired in Kansas City, Mo-based American Century Investment Management Inc. as an example of the kind of mutually beneficially tie-up that can allow Nomura to succeed in markets where the firm has found it tough to pursue organic growth.

    Despite successes such as the growth of Nomura's high-yield bond affiliate in New York, "we tried many times" to gain broader traction in the U.S. market but came up short, said Mr. Watanabe.

    American Century, meanwhile, ticked every box Nomura was looking for, offering strong global equity and global emerging markets capability; strength in a U.S. market Nomura was looking to get into; and a firm without extensive Asian and European businesses that could take advantage of Nomura's capabilities in those regions.

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