Chicago-based Northern Trust Global Investments has put its feet on the ground in Japan for the first time, and plans to plug its quantitative fund management and hedge fund products to Japanese institutional investors.
The move results from NTGI's $100 million acquisition of Deutsche Bank's $44.1 billion passive equity, fixed-income and enhanced index business on January 31. Before the deal, NTGI's own passive fund management business was ranked seventh in the world, which denied it the scale to compete in a high-volume business.
But the acquisition boosted it to number three, behind State Street Global Advisors and Barclays Global Investors, with $370 billion of assets under management of which $110 are passive, says Kevin Rochford, managing director of global sales and client servicing in Chicago. As a result, the firm is finding the doors to the world's top institutional clients are opening.
"We also picked up four or five signature clients in Japan for the quant [i.e. passive] business in Japan," says Rochford, now visiting the new Tokyo office located near the ritzy Okura Hotel. "Northern Trust already had one large banking institutional client here for three or four years investing in our Caymans-registered hedge fund products. As you can imagine, they're now thrilled that they'll be able to receive service in their own time zone."
All told the Japan business is now $10 billion, enough to warrant the brick and mortar, and giving NTGI the chance to sell more aggressively. "We're one of the few foreign fund management firms that will be profitable in Japan this year thanks to the size of our business," Rochford adds.
Kunihiko Nakao is now president of NTGI Japan. He resigned from the presidency of Deutsche Trust Bank late last year after 11 years there to take on this new role. He oversees an office of seven professionals, including two investment managers (a number Rochford says will likely hit 10 by the end of the year).
Nakao's two priorities will be to market the passive business to Japanese public institutions as well as to the shrinking corporate pension fund market, and to sell its hedge fund capabilities.
In particular, says Rochford, NTGI will push its enhanced index product, which best suits many Japanese institutions' needs. "Enhanced indexing will be the investment battlefield for the next 10 years," he says. "Clients have been disappointed with active fund managers, and it also fits conservative institutions that need returns but have concerns about risk."
The post-acquisition NTGI has also launched its first fixed-income passive and international passive products.
"Now that we have clients here, and the size, we're best positioned to sell quant and hedge fund products," Rochford says. "Many public funds still don't have a passive investment allocation. The corporate market is shrinking but it needs incremental returns so we see a lot of hedge fund interest."
Longer term goals include bringing Northern Trust's other two businesses to Japan: wealth management and custody. Rochford recognizes that many Western firms have tried and failed to bring a private banking model to Japan, where the wealthy tend to keep their savings with trust banks. He says Nakao will look at this over the next 12-18 months, once the main business lines are established, to see whether Northern Trust has a role.
Regarding custody, it will ultimately be the call of Lawrence Au, Singapore-based senior vice president and general manager of Northern Trust's Asia-Pacific business. "When Lawrence decides we're ready to get serious about custody in Japan, he'll probably appoint someone locally," Rochford says.
Although NTGI is starting from a position of strength, Rochford says he is aware of Japan's notoriously high costs for servicing institutional clients. "Client expectations here are the among the toughest I've ever seen," he says. But he says one way to mitigate that is to ensure the existing staff are senior and experienced. He also argues that although passive fund management is a low-fee business, scale turns it into a high-margin one. "Besides, Japan isn't the best place fee-wise for active managers," he notes.
NTGI already manages money for Hong Kong and Singapore institutions and is also advising China's National Social Security Fund, an experience the firm hopes will let it learn about the mainland market and contact future prospective clients. It has, however, no plans to open an office in Australia. Despite its new size, SSGA and BGI are already established in Sydney and NTGI would rather concentrate its resources elsewhere.