Foreign asset managers spend more on outsourcing expenses related to operations – not including investment management – than their domestic counterparts in Japan, but the biggest difference is in the proportion of revenue spent on salaries and bonuses, finds a new report*.
The research from Cerulli Associates and Nomura Research Institute (NRI) also points to trends in the country's asset management industry that will benefit fund firms. These relate to the new Nippon Individual Savings Account (Nisa) and investors' steady shift away from reliance on Japan government bonds (JGBs).
Foreign managers spend a total of 39% on remuneration, 12 percentage points more than domestic managers’ annual spend in this area, says the report. “This suggests that foreign managers prefer a flexible and individual approach to pay,” says Yoon Ng, Asia research director at Cerulli.
Meanwhile, outsourced research costs account for more than 20% of both foreign and domestic asset managers’ revenues. For domestic firms, outsourced research expenses go mainly to unaffiliated global sub-advisers. For foreign managers, they flow mainly to their parent company or another overseas affiliate.
To rationalise their cost structures, some domestic managers are trying to internalise foreign investment capabilities that they used to seek from sub-advisers through mergers and acquisitions.
For instance, by acquiring Tyndall Investment Management in Australia and DBS Asset Management in Singapore, Japan’s Nikko Asset Management has developed its own management capacities.
“These attempts, however, are observed in a limited number of asset managers because of the difficulty of determining which managers and asset classes are worth acquiring, and can generate long-term, constant value for domestic managers,” says Sadayuki Horie, senior researcher at NRI.
Meanwhile, the advent of Nisa, the new tax-exempt savings scheme, will encourage a hitherto investment-averse segment of the population to deposit trillions of yen every year for the next five years, says the report.
This trend, it adds, will be reinforced by the inflationary environment as interest rates rise and, from 2014, tax on dividends and capital gains climb from 10% to 20%. This is good news for the asset management industry, which will be enriched by fresh inflows into the investment trust market.
Another conclusion of the Cerulli-NRI research is that Japanese financial institutions’ reliance on JGBs in their investment portfolios is on the wane as the government’s economic policies take effect and bond holdings become riskier.
In addition, fewer JGBs will be available as the central bank’s quantitative easing programme snaps up more five- and 10-year issues. Hence institutions are increasing their foreign bond holdings, notes the study, a trend that will benefit overseas managers as Japanese institutions seek foreign expertise to manage these assets.
* Asset Management in Japan 2013: Opportunities and Challenges for Foreign Managers.