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Money Management

Japan’s ‘Big 2’ becoming a less bountiful fee source

Japan Post Bank joins GPIF in lowering fees, moves to passive credit

Ken F. Yap thinks large mandates will continue to be sought after even if the fees are less profitable.

Japan's two biggest asset owners, a mother lode of mandates for money managers in recent years, are downsizing the bounty managers entrusted with investing their money can hope to enjoy in the way of fees.

Japan Post Bank — the biggest kid on the block with 207.7 trillion ($1.9 trillion) in assets — is moving to reduce its external manager fees as part of a restructuring of its portfolio, according to money managers, who declined to be named.

The bank's 39 trillion — or $355 billion — in offshore credit mandates as of March 31, up almost 300% in the past three and a half years, made the former government-owned behemoth a client that could single-handedly make the difference between a decent year and a great year for foreign managers in Japan.

But the scale that made Japan Post Bank the best friend of active bond managers in recent years is cutting both ways now.

Katsunori Sago, the senior Goldman Sachs & Co. executive who joined Japan Post Bank three years ago as representative executive vice president to build its portfolio investment team, told Pensions & Investments in November that because of the size of its portfolio, the bank had effectively "become the market," and would have to focus on beta more than alpha for returns.

That transition is already well advanced for the bank's U.S. investment-grade credit holdings, which make up the bulk of that $355 billion portfolio, said one Tokyo-based money management executive, who declined to be named. The bank's ultimate goal is to shift 80% of its credit holdings into passive strategies, he added.

For the investment-grade segment, switching to passive from active mandates means a drop in Japan Post Bank's fee burden to 5 basis points or less from roughly 10 basis points, said money management executives, who declined to be named.

More recently, the bank began to restructure the more than $40 billion in bank loan mandates it awarded roughly 10 firms, a more challenging prospect as bank loans don't lend themselves to passive management, executives said.

Even so, the bank is looking to slash its typical fee for bank loan strategies to 15 basis points from 30 basis points, industry executives said.

With the shift to lower fee strategies, mandates for active managers, such as Fidelity Investments and Invesco (IVZ) Ltd., will be trimmed, while allocations to managers with a more passive approach, including BlackRock (BLK) Inc. (BLK), J.P. Morgan Asset Management (JPM) and State Street Global Advisors, will increase, said a Tokyo-based executive with a foreign bond manager, who declined to be named.

Spokesmen for the managers declined to comment or did not respond to requests for comment.

In a June 15 email, Mr. Sago — noting his then-pending June 19 departure to join SoftBank Group Corp. — declined to comment on changes to Japan Post Bank's credit portfolio, deferring questions to his successors.

Kunio Tahara and Taiichi Hoshino, the senior Japan Post Bank executives set to replace Mr. Sago at the helm of the bank's investment portfolio, didn't respond to emailed questions. A Tokyo-based spokesman said Japan Post Bank doesn't provide details of its manager lineup or portfolio construction.

Meanwhile, Japan's other Tokyo-based whale — the 162.7 trillion Government Pension Investment Fund — on June 11 announced details of its well-telegraphed plans to pay only passive fees to managers that fail to deliver alpha.

For managers that do produce alpha, the GPIF's "working paper" outlined its formula for determining the share managers can retain as well as its mechanism for ensuring that losses incurred along the way are recovered before managers rack up performance fees.

Since October 2014, when GPIF boosted its target allocations for risk assets, the pension giant's combined mandates to managers of overseas stocks and bonds have risen by more than $225 billion, with roughly 20% of that total actively managed.

Difficult conversations

Some money management executives contend the changes being put in place this year by GPIF and Japan Post Bank will make Japan a less attractive destination for foreign money managers.

The tougher terms on offer from those bellwether clients should leave many Tokyo-based executives with foreign managers facing unpleasant discussions with headquarters this year, said the local business head for one global firm.

"Everybody is hurt. Nobody is escaping," said the executive, who declined to be named.

Even so, the Asia-Pacific head of another big global money manager, who also declined to be named, said Japan remains a very attractive market, even if the scale of the opportunities it offers can be said to have fallen from "shockingly" good to just "amazing."

If the profitability of those mandates is set to become "less attractive for asset managers," they'll nonetheless continue to be sought after, said Ken F. Yap, Singapore-based managing director, Asia with Cerulli Associates. It remains "very much a volume game, so I think managers would still rather be in it," Mr. Yap said.

The pain managers feel from the changes underway at Japan Post Bank and GPIF will likely be proportional to the book of business they already have with those clients, noted the global manager's Asia-Pacific head.

Reason to hope

For firms like his, which are still gearing up in Japan, there's little reason to be discouraged and ample reason to hope that low fees can be offset by the scale of the mandates on offer, he said.

And there are still a number of opportunities for new managers.

For example, two industry players noted Japan Post Bank appears to be favoring boutiques for its next round of bank loan and credit mandates favoring European credit as the rising costs of hedging dollars back to yen pinch returns on U.S. paper.

Some observers tied that focus on boutiques to the bank's broader effort to reduce its fee burden.

Japan Post Bank is targeting medium to small-scale boutiques willing to expand in Japan for lower fees, said the Tokyo-based executive with a foreign bond boutique.

Others see that change resulting from recent additions to the bank's investment team.

"They are seeking new types of boutique managers, probably because a few ex-Goldman Sachs Asset Management specialists in this area moved to the bank and they have discerning eyes to hire those … managers," said one industry analyst, who declined to be named.