When Sumitomo Mitsui Trust Holdings issued its statement Regarding the Policy for Enhancement of the Conflict of Interest Management Structure relating to the Asset Management Operations … on 31 January the announcement ran to four pages of thoughtful prose and a single-sheet press release.
The next day the Nikkei walked straight passed the point with a story headlined Changes likely at top of Japanese asset management industry, reporting that SMT was: ‘considering a group reshuffle to separate its banking and asset management businesses … to create Japan’s largest asset management company’.
The banking group promptly said no decisions had been made but two days after that a Hong Kong-based newsletter, reporting the 31 January announcement, added yet more supposed and unsubstantiated motives noting:
‘Whilst the negative interest rate policy pursued by the Bank of Japan places pressure on the profitability of Japanese banking groups, it is possible for the groups to seek integration opportunities as a means of boosting the scaleability of their businesses in order to curb costs’.
Well, yes it is possible, but this is even further from what SMT was asking the public to understand as the context for any future moves which will do nothing to change its market share, do little, if anything, to reduce its costs and offers no ‘integration opportunities’.
Whatever is under consideration at SMT it comes after the move by Mizuho Financial Group and Dai-Ichi Life last October to dissolve their DIAM Co asset management venture and form a new entity taking in Shinko Asset Management and Mizuho Asset Management along with the asset management division of Mizuho Trust & Banking to form Asset Management One (see archive 2016-10-4 New asset manager debuts with little fanfare but loads of loot).
Also in October last year the Nomura Research Institute published a paper on Fiduciary best practices for Japanese asset management companies which drew on a review of, and visits t0, 17 foreign fund firms headquartered in the US, Europe and the UK.
This document is an interesting read even to those familiar with the industry’s wide variety of corporate ownership and governance structures – stand alone, life co subsidiary, bank affiliate, bank subsidiary with separate board, and the many more possible permutations — as it shows them starkly side by side.
It then makes recommendations for the stewardship structures that might be best adopted by Japanese firms to ensure they meet their fiduciary duty of putting clients’ interest first.
One standout point is the need to prevent staff in asset management roles from betraying information about their or their clients’ activities to personnel from their employers’ other –now typically vast — financial businesses.
In the Japanese context his means an end to the revered practice of job rotation which has roots going so deep that without it banks might have found it difficult in the mid-1990 to break into the segregated pensions business at all.
Before then the local pensions landscape had been much the same as that in the US before ERISA was enacted in 1975; a sponsor placed its business with a trust bank or life insurer (often in the same keiretsu) which provided administrative, custody and other services as well as managing the assets in pooled accounts. The investment returns were terrible.
So once pension funds could begin offering mandates for specific amounts to be managed in specific ways the trust banks and life cos had to start from scratch and to scramble together whatever inhouse talent they could muster into specialist subsidiaries to compete with the foreign firms who were flooding in and doing very nicely.
Neither the banks nor the life cos had mutual fund operations from which they could second staff since the investment licences necessary to running such businesses were issued only to securities companies that, once again echoing US regulation from a previous era, were prohibited from running banking operations.
The years of prolonged crisis into which both the life insurance and banking sectors fell from 1995 (see Japan’s consolidating banking system and Japan’s shrinking life insurance sector under ‘Reference points’ at right) forced them into repeated restructurings and brought some flexibility into these arrangements.
Many firms which are bank subsidiaries, including Sumitomo Mitsui Asset Management, today hold licences which enable them to manage money mandated to them by pension funds and run mutual funds. At the same time, banks such as Sumitomo Mitsui Trust can now manage segregated assets for pension funds in addition to those which are pooled.
Today SMTB is part of the Sumitomo Mitsui Financial Group which has a host of other financial undertakings from which best practice in stewardship and fiduciary management suggests it should be separated so that its clients’ interest are not compromised.
It was a reorganisation to do just that which SMT set out in its 31 January announcement. Assertions that the move is aimed it becoming Japan’s biggest asset management or seeking scalability are simply silly.
Sumitomo Mitsui Trust Holdings is already Japan’s largest asset manager and 23rd in the world according to Pension & Investments/Willis Towers Watson’s latest annual ranking. Moreover the firm already heads the Japanese league tables of managers for both pooled and segregated assets (for details see under the ‘Rankings’ tab at the top of this page).
The supposed ‘integration opportunities’ and ‘scaleability’ to be wrung from preventing information about either type of client from seeping into the group’s other operations are fanciful.
© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.
This blog would not exist without the help and humour of Diane Stormont, 1959-2012