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Money Management

Mitsubishi UFJ takes first step in building global money management business

Signage for MUFG Bank Ltd., the main banking unit of Mitsubishi UFJ Financial Group Inc., center, stands in Tokyo.

Japanese banking giant Mitsubishi UFJ Financial Group Inc. took a giant first step on Oct. 31 toward its professed goal of building a global money management business with its announced deal to acquire Australia's Colonial First State Global Asset Management — and a promise of more to come.

The acquisition of Colonial First State, a Sydney-based money manager with A$213 billion ($154 billion) in assets under management, is "just the beginning," said Yutaka Kawakami, Tokyo-based executive officer and general manager, global asset management business division, with MUFG affiliate Mitsubishi UFJ Trust and Banking Corp., in an interview.

If completed by mid-2019, as planned, the acquisition of Colonial First State, also known as First State Investments outside of Australia, would lift MUFG's current AUM of 72.5 trillion, or $642 billion, to roughly $800 billion — positioning the firm to challenge Sumitomo Mitsui Trust Holdings Inc., with about 92.9 trillion, or about $820 billion as of Sept. 30, for bragging rights as the Asia-Pacific region's largest asset manager.

The move, which would provide exposure to faster-growing markets for a Japanese business facing severe demographic headwinds, drew positive notice from some on the sell side. Rie Nishihara, a Tokyo-based senior analyst with J.P. Morgan Chase & Co., in a Nov. 1 report, welcomed the deal as "the first to give shape to MUFG's medium-term ... strategy of expanding its asset management business."

MUFG executives said that strategy revolves around extending the business' range of investment capabilities — beyond the firm's current strengths in Japanese and global equities and fixed income, multiasset and domestic real estate — while tapping into regions enjoying stronger growth than a Japanese pension sector where asset gathering is giving way to net payouts.

The Colonial First State deal would move the needle for MUFG on both counts — adding solid offerings in Asian, emerging market and systematic equities, as well as alternatives such as infrastructure and real estate, while bringing in roughly $88 billion of business from Australian clients and $45 billion from investors in Europe, the Middle East and Africa.

The purchase would lift asset management's contribution to MUFG's gross profits to 7% from 5%, bringing it largely in line with other major banking groups, including J.P. Morgan, Morgan Stanley (MS) and BNP Paribas SA, according to materials provided by MUFG.

In a handful of news reports last year, Mikio Ikegaya, president and CEO of Mitsubishi UFJ Trust and Banking, spelled out more ambitious goals with some specifics, including the possibility of spending as much as 1 trillion to acquire overseas managers and lifting the group's money manager AUM to more than 100 trillion.

Mr. Kawakami said more than those specifics, the takeaway from Mr. Ikegaya's statements should be the strength of the leadership team's conviction that money management is a core business for the group.

He said his team isn't targeting a specific contribution by the money management business to group earnings, and feels no pressure to rush — as demonstrated by the fact that "we've taken years to implement the first investment."

And while the Colonial First State acquisition won't be the end of MUFG's expansion into money management, for now the focus is entirely on getting that first step right, Mr. Kawakami said. The A$4.1 billion price to purchase Colonial First State from Commonwealth Bank of Australia is "not small, even for MUFG," he added.

Mr. Kawakami pointed to Paris-based Natixis Investment Managers as a potential model for the hybrid global structure his firm is looking to build — with a single brand in its home market and a multiboutique structure for its overseas operations.

One long-time money management executive in Tokyo, who declined to be named, called that choice an obvious one. With the differences in corporate cultures between homegrown money managers and those in the U.S. and Europe, the prospects for a Japanese firm to follow BlackRock (BLK) Inc. (BLK)'s strategy of acquiring a series of big asset management firms and integrating them into the New York-based giant's "One BlackRock" culture are pretty much nil, he said.

Mr. Kawakami said his team knows it is facing a learning curve as a Japanese firm taking majority control of an overseas manager for the first time.

MUFG previously has taken minority stakes in overseas managers, including a 9.9% holding in Edinburgh-based Aberdeen Asset Management PLC in 2008 — since diluted to 5.8% after Aberdeen's 2017 merger with Standard Life PLC, and a 15% stake in AMP Capital Holdings Ltd. acquired in March 2012.

While there have been exceptions, such as Tokyo-based financial services conglomerate Orix Corp.'s 2013 purchase of a 90% stake in Robeco Groep NV, most Japanese financial firms have continued to settle for taking minority stakes in overseas managers. Recent examples include Nippon Life Insurance Co.'s December 2017 purchase of a 24.75% stake in TCW Group Inc. from Carlyle Group LP and Nomura Group's mid-2016 purchase of J.P. Morgan Chase's 41% stake in American Century Investment Management Inc.

Mr. Kawakami said as a quintessential Japanese firm, "we do recognize there are a lot of differences to manage an (overseas) asset management company, including remuneration, brand, stuff like that," he said. A multiboutique model, where MUFG gives autonomy to each investment management company, should prove "the best fit for the time being," he said.

Market veterans, while conceding the change of ownership could put key Colonial First State investment professionals in play, said MUFG's many overseas acquisitions and tie-ups with foreign financial firms should give it considerable credibility as an owner.

It remains to be seen if MUFG, as an owner, can avoid being bureaucratic and slow to make decisions, but the group has a strong record managing foreign firms, including San Diego-based Union Bank, as well as working with investment banks such as Morgan Stanley, said Toyoki Sameshima, Tokyo-based senior analyst with SBI Securities Co. Ltd.

"I am optimistic ... MUFG will be able to manage (Colonial First State) well," Mr. Sameshima said.

J.P. Morgan's Ms. Nishihara, in a section of her Nov. 1 report outlining potential risks for the deal, said "MUFG's investment in the asset management business could lead to a loss of talent and hence a loss of customers and/or assets under management. However, management said it has checked the risks, as the deal is the group's first majority stake in the asset management business outside Japan."

Mr. Kawakami said MUFG will aim for both organic growth as well as inorganic, but global demand for Japanese equities — where MUFG has a competitive edge — is "rather limited." MUFG's more than $10 billion invested on behalf of overseas clients, while a substantial sum in its own right, remains a fraction of the group's AUM.

MUFG's domestic asset management business, with "dominant positions in the (domestic) pension market and the retail market," will continue to be run under the MUFG brand, Mr. Kawakami said.

Materials provided by the group show Mitsubishi UFJ Trust and Banking with a 23%, or 16.2 trillion, share of Japan's corporate pension market and an additional 9%, or 8.7 trillion, share of the country's investment trust fund market.

If the pension market can't offer strong growth prospects now, the retail side, where Japanese consumers continue to park well over $15 trillion in low-yielding bank deposits, will eventually offer more substantial growth, Mr. Kawakami predicted. If that long-predicted shift to investments from bank deposits has failed to materialize so far, "the question is not if, but when," he said.