Interview with Alvaro Tamura, Gordian Capital.
What are some of the recent developments in the asset management business in Tokyo and what is the outlook?
The Covid-19 pandemic has slowed activities in 2020 but it is likely that some of the asset management trends that began around 2017 remain in place given the underlying factors driving those trends.
One exciting trend has been the steady number of Japan-based hedge funds being launched by managers with pedigree, track records, and assets to sustain them during the startup phase of their funds. The new Japan-based funds have strategies covering equity long/short, activism, global macro, pre-IPO, venture capital and real estate, among others. The establishment of a trading base in Tokyo by large platforms has helped train a new generation of traders. There is now a critical mass of risk-taking activity taking place in Tokyo away from the traditional sell-side trading. More importantly, the new breed of traders appears to value the home-field advantage and the quality of life that Tokyo provides. The personal tax benefits of launching a fund in a more tax-friendly jurisdiction is not necessarily the determinant factor of where to launch a fund.
Another trend has been the establishment of offices by large offshore asset managers for investor servicing, deal origination, and fund raising. The ecosystem to support the new level of activity continues to grow with new service providers opening offices in Tokyo.
Contrary to this rose-coloured view of the industry, an immutable fact has been the lengthy process for obtaining an investment-manager license. The requirement to be fully staffed at the time of application for the license translates into high setup and carrying costs. That said, specialised firms, such as Gordian Capital Japan, part of the Gordian Capital group with USD5.3 billion AUM across its fund platform, offer fund platform solutions to GPs and managers, that significantly reduces time, cost and uncertainties of establishing a regulated base to house key investment professionals on the ground. Importantly, Gordian Capital Japan does not manage either proprietary or third-party capital, thus eliminating a clear potential conflict of interest.
What are the main opportunities and challenges for managers based outside of Japan when raising funds from Japanese institutional investors, in particular in relation to pension funds?
For managers seeking to raise assets from Japanese institutional investors, the opportunities are enormous. For example, the size of the pension fund market alone, is approximately 338 trillion yen (USD3.11 trillion), of that, public pension funds including GPIF are 226 trillion yen (USD2.08 trillion) and corporate pension funds are 112 trillion yen (USD1.03 trillion). Of the latter, the market size for defined benefit pensions is 78 trillion yen (USD718 billion).
The pension fund managers are dealing with not only the impact of low interest rates but with a rapidly aging population seeking to retire and a dearth of onshore investment opportunities. More specifically, for over 70 per cent of the defined benefit pension funds, the target returns sought by the pension funds are in the range of 2.5 to 3 per cent while 10-yr government bonds yield around zero. As a result, the need for incremental additional yield is very high but it is estimated that only 13.7 per cent of the defined benefit pension fund assets are in non-traditional investments. Although hedge funds were the initial targets for diversification, pension fund managers have begun to expand their investments to a wide range of investment strategies including private equity, infrastructure, direct lending and special situations among others.
Against this backdrop, managers from outside Japan naturally will conclude that by attracting just a very small slice of this demand, they would be able to not only add to the assets they manage but diversify their investor base. However, the challenge of raising assets from Japanese institutional investors, as is well known, requires great effort, determination and perseverance. Beyond the distance and language barriers, the extent of the undertaking cannot be underestimated. The hurdles that await an offshore manager seeking to raise assets from pension funds, for example, may offer some light as to the challenges.
The pension fund’s decision-making process is multi-layered and, as a result, extremely time consuming. Many pension fund managers hire consultants, which help them vet their alternative investments. The pension fund managers, who are not necessarily incentivised to maximise returns, are, in fact, extremely risk averse. Often, they do not have the necessary expertise and, as a result, they rely on consultants to offload professional risks. The result is a system that has given consultants inordinate gate-keeping power. Having consultants give the green light to the offshore managers has become one of the first big hurdles managers must clear.
In Japan, the defined benefit pension funds, unless registered with FSA as a qualified institutional investor, must make use of regulated fiduciary managers insurance companies, trust banks and discretionary investment management (also known as DIM) firms. As of March 2020, there were 131 fiduciary managers with pension fund mandates. Finding a firm with the necessary language skills, the ability to work with and between both domestic pension funds and offshore mangers and the expertise to be the fiduciary manager is much harder than the number of existing fiduciary managers would imply. Most of the DIM firms are obviously focused on their inhouse products. Some of the large ones have separate business units handling third-party products but many of them have long-established relationships with competing products thereby creating a shelf-space problem for new offshore managers seeking to enter the market. The problem is compounded when the fiduciary manager has signed exclusive distribution agreements with particular offshore managers thereby further limiting access to pension funds.
The trend now is for some of the larger offshore managers to establish their own offices as part of a long-term strategy to cater to Japanese investors. For those interested to test the water initially or for those whose budgets preclude them from establishing a fully-fledged base in Tokyo, there is an option to work with independent fiduciary managers, such as Gordian Capital Japan, which offer the necessary language skills, a culturally blended team, flexibility, expertise and established relationships.
Alvaro Tamura
Managing Director & CEO, Gordian Capital Japan Limited
In a career spanning over 21 years at Morgan Stanley in NY and Tokyo, Alvaro was a founding member of the Japan interest-rate derivatives desk covering global macro funds, the Japan Global High Yield trading desk and the Japan Special Situations Group, which focused on proprietary investments in special situations, private equity and real estate. Prior to joining Gordian Capital Japan, he worked on fund advisory and due diligence at a boutique asset management firm. Alvaro earned a BSE in Electrical Engineering and Computer Science from Princeton University and an MBA from The University of Chicago.
