For the new Sumitomo Mitsui, integration begins abroad

On paper, Sumitomo Mitsui Trust Group came into being in April this year and manages ¥64 trillion ($786 billion) of assets, making it the single biggest manager of assets sourced from Asia-Pacific.

In practice, the true integration will begin in its asset-management operations in Hong Kong and London, which are set to combine in the second half of this year, while the domestic integration process will begin in the following Japanese fiscal year, in April 2012.

The merger involves Sumitomo Trust & Banking (STB), on its own already Japan’s biggest asset manager, and Chuo Mitsui Asset Trust & Banking. Both trust banks also have affiliated fund-management arms, STB Asset Management and Chuo Mitsui Asset Management (CMAM). Sumitomo is also the majority stakeholder in Nikko Asset Management. (Nikko AM’s management says longstanding plans to take the company public are still intact.)

Both organisations have sizeable real-estate investment management and property operations, while Chuo Mitsui also brings an asset administration business, a private-equity fund management company, and a business alliance with the UK’s Standard Life Investments.

Although a combined board of directors was announced in April, with STB’s Hitoshi Tsunekage named chairman and Chuo Mitsui’s Kazuo Tanabe named president, it is overseas where ‘Sumitomo Mitsui Trust Group’ will begin to become a reality.

(This should not be confused with Sumitomo Mitsui Asset Management, owned by a consortium of life insurance companies. More baffling, these other parents include Sumitomo Life and Mitsui Sumitomo Insurance. In Japan, ‘Sumitomo’ and ‘Mitsui’ are family names; like the heirs of John Pierpoint Morgan, they have proliferated into a variety of unrelated businesses.)

STB has had an office in Hong Kong for investment management for about 10 years under the name Sumitomo Trust Finance, where it manages Asia equity and fixed-income strategies, primarily for Japanese clients. It also has a sales office in Luxembourg.

Chuo Mitsui has a smaller office in Hong Kong that’s only about two years old, but a bigger, more established sales office for CMAM in London.

These are both being consolidated now, says Seigo Kimoto, general manager and executive officer of the investment-planning department at Chuo Mitsui Asset Trust and Banking.

The Hong Kong office will be combined and the products eventually merged into high-risk and medium-risk Asian equity and bond strategies. The Luxembourg office of STB will move to London (although the Luxembourg office will remain open, as the bank maintains a custody team there).

Kimoto says the foreign offices are at the vanguard of creating the new group partly because they are small and therefore easier to handle, but also because they represent the future for Japanese trust banks.

The industry is seeking to grow in three ways. First, by selling products to international investors. Second, by developing their Asian equity and bond capabilities. Third, by expanding into retail markets through the banks’ affiliated commercial banking branches.

This is necessary because the traditional source of business for trust banks, managing the assets of public and corporate pension funds, is trending flat.

Corporate pension assets are shrinking. Public funds are not, but they tend to invest in long-only liquid instruments, where trust banks face competition from asset managers such as Nomura Asset Management, BlackRock or Fidelity. Trust banks’ high-margin products are in real estate and Reits, which most public funds are not allowed to use.

The international market of institutional investors is seen as key to allowing trust banks to grow. The combination of STF and Chuo Mitsui's London-based trust operation will lead to active selling of Sumitomo Mitsui Trust Group products out of London, both in Japanese and Asian equities and fixed income.

Kimoto acknowledges it will still take time for the group to make an impact, despite its size. It will need both to woo asset consultants and to develop track records in Asia ex-Japan products.

Moreover, it lacks a brand name with wholesalers and will need to rely on Chuo Mitsui’s alliance with Standard Life Investments to cross-sell the merged entity’s products.

However, Kimoto says the integration will be real, as opposed to amalgamating different banking silos or tribes that forever maintain their own IT platforms, teams and culture. “We are looking at a complete merger,” he says. “Our management is not obsessed with the old bank names.”