Japan continues to be an attractive investment market for many global asset managers despite an uncertain macroeconomic climate and the fade of globalization. David Semaya of Japanese institutional manager Sumitomo Mitsui Asset Management (SMTAM) shares his thoughts on how to enter this market, how his firm is addressing three major investment industry themes, including ESG standardization, and the value of partnerships with service providers.
Tomoko Kenny: What are the three biggest opportunities and risks that your company is facing in the business and regulatory environment?
David Semaya: We face an investment environment that's very challenging. Since the 1980s, interest rates were as high as 17% and they’ve been coming down further over the last 40 years. In Japan, they were negative,1 as they have been in Europe. But due to the Covid pandemic and the war between Russia and Ukraine, for the first time in many years, we have inflation and central banks around the world are raising interest rates. That takes liquidity out of the markets. So, while we’ve had a very favorable investment environment for a long time, I think we'll have a much more challenging business environment for the next 3-5 years.
In terms of regulation, we’ve had much more to deal with, including Brexit and especially in the ESG space. There will be decisions made in Europe, for example, around taxonomies, and how to label a sustainable fund. Those standards may be a bit different from what might happen in the U.S. and the rest of world.
This is an area we’ll watch closely because in the investment world we like to have one standard as much as possible. For example, we have come close to standardization in the equity investment space where there are only a few global indices to choose from. As managers for our clients, including pension funds, sovereign wealth funds, and even individuals, we have together built an investment ecosystem around standardization. So, when ESG evolves as an important theme not only for us in the investment world, but for the entire world, getting to standards is very important.
And lastly, for the last 5-6 years the industry has moved away from a widely held belief that globalization was moving forward, and we were pulling together in our collective thinking that it was a good thing, particularly for economics and investment.
Over the last four or five years, we've seen globalization fade. Today, the industry is asking questions such as, do we have a multi-polar world? Do we have two systems that are going to emerge? Is there decoupling (of investment markets geographically)? We had all these assumptions about developed markets, emerging markets, regulatory standards, and when that all comes apart, uncertainty enters the equation and influences how we think about investment. It could mean that we won't make decisions to invest in certain markets. This wouldn’t be ideal, but we’ll have to deal with that.
TK: Based on these considerations, what is your focus for the next 12 months and how do you plan to adapt to these risks and opportunities?
DS: First, the investment business is a human capital-intensive business. It isn't about us necessarily investing into a new factory or plant. There are a couple of areas where we must think about where we allocate our financial resources. I believe one area that will be very important to continue investing into is our digital infrastructure, and not just the hardware.
It’s also about the talent. We need the people who understand how to think about all these issues by using technology and digital tools to figure out solutions. For investing, that is our raison d'être. It's what we do.
The second area that I think is very important, and one where BBH has done a spectacular job, is to have partners like yourselves. The firm may not be the experts in what we do, but rather the experts in what we don’t do. That includes understanding the parts of the value chain of investment management that are not our core business: settlement, custody, and the regulatory environments surrounding those areas. Of course, we need to be informed and understand those environments, but we look to a provider like BBH to be the subject matter experts and stay ahead of the changes.
TK: What advice can you provide global asset managers who are looking to expand into Japan or develop their client base in this market?
DS: It's a great question. First, Japan offers numerous positive attributes and factors for those asset managers who are sitting outside of the country, and who don't have a business there. Chief of these is a very large pool of assets: not just in investments, but also in bank deposits (household financial assets are at a record $17 trillion.)2
There are also very large buckets of assets sitting in public pension funds3 and in private pension funds such as retail mutual funds and institutional private placement mutual funds.
Certain areas that are gaining in popularity are of course ESG-related. There's more interest in infrastructure investment and private investment. So, 15 or 20 years ago, the allocation for Japanese investors was much more geared towards a home country bias, and there is still some of that bias. However, these days, it’s much more global. So, I think that's the opportunity for global managers.
So, the market itself is quite attractive from a size perspective. However, from a cultural perspective, there are some things to consider, including the language. Japan has an onshore market, and Japanese distributors and investors operate mostly in their own language. The Japanese investment industry also has a long history of more than 50 years, and there are protocols and standards that have been put in place.
To enter Japan, it’s not just about understanding those protocols, how business is done and understanding the high standards of Japanese people when it comes to things like settlements, which are very precise, and client servicing. It's also about your own products and one's own investment strategies. Questions to ask include do they provide alpha if they are active strategies and is the alpha sustainable?
If the products are private assets, are they competitive? Do they make sense for the Japanese investor and for the individual and corporate pension funds’ asset allocations? What percentage of their assets are in Japanese assets? What percentage are in overseas assets? What percentage is illiquid? If managers can figure that out, and they are confident that they have the product that makes sense for the Japanese market, then they have a few options. One is to make the investment and enter the market.
They can start with opening an office and hiring in human capital. This may be daunting, but there are a couple of ways to approach it. For example, the Fin City Tokyo4 initiative provides infrastructure and legal support to firms looking to enter Japan. There are also many local asset management businesses who these firms can engage. For example, Sumitomo Mitsui Trust Asset Management has a platform of non-Japanese managers that we do due diligence on and assess whether their products are relevant to our client base and whether they can generate sustainable returns.
1 Interest Rate in Japan averaged 2.36 percent from 1972 until 2022, reaching an all-time high of 9 percent in December of 1973 and a record low of -0.10 percent in January of 2016.
3 The Government Pension Investment Fund, Japan (GPIF), for example, has $1.75 trillion in total assets
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