Japan pension AUM hits tipping point
The value of portfolios invested for Japanese corporate and government funds declines, but a new crop of managers is winning first-time mandates from this sector, indicating a desire among these institutions for products that provide yield with differentiating structures.
Portfolios mandated to third-party asset managers by corporate and public pension funds in Japan declined year-on-year by 4.54% to ¥79 trillion yen ($99 billion) as of the fiscal year end March 31.
Many schemes have passed the tipping point where the number of retirees outweighs that of contributing members, according to the Japan Pensions Industry Database. The JPID provided these figures based on analysis of filings with the Japan Securities Investment Advisers Association (JSIAA) by its member firms.
The figures and full analysis were published today on the JPID's website, www.ijapicap.com.
As total assets decline, the stranglehold by the top players might appear to have tightened: BlackRock Japan, Sumitomo Mitsui Trust Bank and Mizuho Trust & Banking continue to dominate the market overall with a 44% share. However, the AUM at these three firms fell by more than the market average decline. (The fourth biggest player, Resona Bank, is excluded from the study because it is not a member of the JSIAA.)
Pension funds currently report that 110 third-party asset-management firms are running a total of 5,186 mandates. Foreign firms make up 14 of the top 25 managers, including BlackRock (number 1, with ¥13.8 trillion), State Street Global Advisors (number 5, with ¥4.1 trillion), JP Morgan Asset Management (number 10, with ¥1.5 trillion), Goldman Sachs Asset Management (number 11, with ¥1.5 trillion) and Pimco (number 14, with ¥1.4 trillion).
Most of the top-25 asset managers' pension fund portfolio AUM numbers have declined, although several recorded modest increases, including Nomura Asset Management, Diam, Tokio Marine Asset Management, GSAM and Pimco.
More promisingly is the fact that this fiscal year saw 10 firms report winning their first mandates from the pensions sector. "There is still a market for those who can differentiate their offerings," says Jo McBride, publisher of the JPID. "As the search for yield intensifies, demand for new products that provide it should grow."
Those 10 firms are: Best Mix Investment, ING Mutual Funds Management, ITC Investment Partners, KTOs Capital Partners, New-S Asset Management, Mitsubishi UFJ Morgan Stanley Securities, Mizuho Global Alternative Investments, Seiryu Asset Management, SMBC Nikko Securities and UBP Investments.
Despite these victories, scale plays a vital role in Japan's asset-management industry, a trend likely to be exacerbated by this year's scandal involving AIJ Investments, which has unfortunately tarred small, independent firms among many pension funds (see AsianInvestor magazine's June edition).
Almost all asset managers are owned by a bank or an insurance company, and these have gone through many bouts of M&A. The most recent and biggest example of consolidation is this year's amalgamation of Chuo Mitsui Asset Management and STB Asset Management, following the merger of Sumitomo Trust & Banking and Mitsui Trust Holdings. (Sumitomo Mitsui is also the parent of Nikko Asset Management.)
Consolidation also enabled BlackRock to become the biggest manager of pensions in Japan, thanks to its acquisition of Barclays Global Investors in 2009.
McBride says the pension schemes these funds serve face not just challenging demographics, as savers convert into pension beneficiaries, but new accounting rules. Scheduled for the 2013/2014 financial year, these rules will require defined-benefit plans – which make up the vast majority of Japanese corporate pensions – to recognise their under-funding levels and make good on the shortfalls.
"Fund firms' focus will need to shift from managing internal integration to identifying the products and markets that will generate the necessary yields without excessive risk," McBride says. So far no firm has yet developed a sustainable, winning business model.