Recently released year-end results show assets under management for Japanese asset managers were down 12% in the year ended March 31, as Gavin Blair reports
Assets under management (AUM) from Japan’s pension schemes fell nearly 12% in the year to March 31, though this was negatively affected by the depressed stock market following the triple disasters of March 11.
Fund managers saw assets fall from to ¥83trn (US$1.08trn), from ¥94.3trn the previous year, according to figures recently compiled by the Japan Pension Information Database (JPID).
BlackRock Japan maintained the top position it gained from Sumitomo Trust & Banking two years ago when it took over Barclays Global Investors. However, it saw AUM fall from ¥18.161trn to ¥14.591trn, taking its market share from 19.26% down to 17.63%, largely accounted for by losing mandates from the huge Government Pension Investment Fund (GPIF).
The figures, based on returns submitted to the Japan Securities Industry Investment Advisors Association (JSIAA), don’t show how much of the gains or losses are explained by investment performance and how much by mandates being switched around.
Mizuho Trust & Banking leapfrogged over Sumitomo Trust & Banking into second place with a rise in assets from ¥11.232trn to ¥12.425trn, on the back of gaining GPIF mandates. This made it the only manager in the top 40 to post a significant gain in AUM.
Sumitomo T&B posted the heaviest losses among the major managers, due largely to a 21.5% drop in its GPIF assets, taking its AUM down to ¥11.938trn from ¥15.140trn.
The funds at four, five, six and seven in the rankings remained unchanged, with State Street Global Advisors, Nomura Asset Management and DIAM all posting falls of various sizes in their AUM, and only Tokio Marine Asset Management showing a small gain.
Newly created Meiji-Yasuda entered the top ten in eighth spot by virtue of their merger boosting AUM to ¥2.083trn. J.P. Morgan AM Japan was the other new entry in the top ten, with a below average fall in AUM of around 5% to ¥1.608trn.
Northern Trust Global Investments Japan crashed out of the top ten to 15th spot by losing a massive 68.3% of its GPIF assets, taking its overall AUM from ¥3.539trn to ¥1.191trn.
“The end of the financial year was in March, when markets had fallen sharply after the disasters in Japan, so it’s difficult to draw any long-term conclusions from the end of year figures, or even any medium-term ones,” said Jo McBride, founder of the JPID.
According to Shigenori Kawamoto, group leader of the business development group, discretionary and advisory services division at domestic manager DIAM, there are other factors that explain the fall.
“The earthquake in March, which depressed the market, had some impact on the AUM drop in the last Japanese fiscal year. However, a more critical issue we are facing is that there is a shift among Japanese pension funds towards lower-risk strategies and from active to passive investments,” said Kawamoto. “This means assets are shifting from active asset managers to trust banks and/or life insurers who offer passive or yield guaranteed products.”
According to Kawamoto, the two main reasons for the shift to low-risk investments are the low return expectations from Japanese equities and fixed income, and a coming change in the accounting rules to IFRS standards, which are expected to be implemented in a couple of years. [Losses from pensions will no longer be able to be amortised over long periods, but will have to be reported in that year’s financial statements – which can have a big impact on balance sheets, thus encouraging them to be more conservative.]
This could be more bad news for foreign asset managers hoping to gain mandates from Japan’s still huge pool of pension funds, following last year when domestic managers overtook them for the first time in terms of AUM.
However, the JPID’s McBride believes the declining population could push Japanese pension funds somewhat in the other direction in a more active search for yields. “With a shrinking workforce, the economy is going to shrink unless the workforce achieves some amazing, and continuing, productivity gains to compensate. And Japan has a very productive workforce already,” said McBride. “So the pension funds will have to seek growth abroad, as Japanese companies will have to.”
“I think there’s also a chance that pensions will increase investment in private equity, though the current lack of liquidity may be making them nervous about it,” she suggested.
DIAM’s Tatsuro Karitani, a senior relationship manager in the discretionary and advisory services division, is more pessimistic. “It’s unfortunate, but with the amount being paid into pensions shrinking and low rates of return on investments, the payouts are bound to fall in the future.”
Though with deflation seemingly becoming the norm in Japan, very low rates of return may be a more than satisfactory result for many.
“It’s a tough environment for Japanese pensions, with low returns, the strong yen, weak domestic market and so on,” DIAM’s Kawamoto pointed out. “There are a number of trends emerging because of this: the lowering of dependence on equities beta, an increase in dynamic hedging, a shift to alternative investments and a move away from using benchmarks.”
“Dynamic hedging involves a flexible hedging strategy that can be customised to a client’s requirements,” explained Kawamoto. “For example, if the maximum loss a client is prepared to take is 10%, then the hedging increases as it nears that level. If the market is very strong, then the hedging is reduced so as not to negatively impact gains.”
The reason alternative investments are growing is that the recent volatile equity markets are prompting clients to include strategies that have low or no correlation with equities into their portfolio, according to Kawamoto.
This growth in alternative assets is likely to lead to an increase in the frequency of mandates being switched around.
“Although pension clients maintain the same three year evaluations of traditional asset managers, for alternative investments, it’s often only one year, meaning that mandates are moved around more frequently for those if their performance is not ideal,” said Kawamoto.
The continuing strengthening of the yen is unlikely to have a major impact on investment strategies, according to Karitani, though “more attention is being paid to risk control and currency hedging.”
“Although there is also another school of thought that the yen strengthening has come to the end of its course and will begin to reverse so they will start to unwind their hedging position, there seem to be more investors who adopt hedging than unwind it,” suggested Karitani.
With a rising yen, a falling workforce, and a growing pool of pension payees, the one thing the Japanese pension market won’t be doing over the next year is standing still.
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