Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
Western, which is one of several independent asset-management companies within the Legg Mason group, now runs the $55 billion global bond fund, which accounts for the majority of its AUM and revenues in Japan. (The firm reported to AsianInvestor magazine it manages a total of $68 billion in Japanese-sourced assets as of September 2007, making it in AUM terms the fourth-largest foreign manager in Japan.)
In 2006 it also received a discretionary asset-management license from Japanese authorities in order to run segregated accounts for pension funds, both public and corporate. Next it wants to broaden its institutional business by acquiring a broker-type license from the Financial Services Agency that would allow it to manage money for financial institutions, including insurance companies and banks.
Naoya Orime, WesternÆs Japan representative director, believes financial institutions will look to outsource more of their assets. ôThey canÆt invest in credit, mortgage-backed securities and emerging-market debt so easily,ö he observes. Moreover, Basel II rules require banks to reduce their total risk exposure, which has led them to cut mandates in equities or hedge funds, and he believes there is a growing need for advice from fixed-income specialists to square the need to diversify bond portfolios while keeping a firm eye on risk/return ratios.
Insurance companies do not fall under a Basel II-like framework; instead they are actively trying to increase their investment risk, by going into high-yield, emerging-market debt and alternative strategies. They are increasingly forced to invest overseas, because the huge demand among Japanese institutions for long-term bonds has helped drive domestic yields down to negligible levels. ôFixed income is driving their need for diversification,ö Orime says.
Western is now looking to hire for additional roles in business development and sales to pursue the financial institutional market, once it receives the necessary license to solicit them. In the short run it will rely on third parties (mainly large brokers such as Nomura Securities, Mizuho Securities and Goldman Sachs) to market its services to financial institutions. Once it receives a license it will begin to lobby banks and insurers directly as well.
The firm already boasts a local investment team that can produce Japan-domiciled, yen-denominated global fixed-income products.
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