The timing could have been better. Just days before the finalisation of the merger of the Sumitomo Trust & Banking Co and Chuo Mitsui Asset Trust & Banking Co, the latter was fined by Japan’s Securities and Exchange Surveillance Commission (SESC) for an insider trading breach that took place nearly two years ago.
On 30 June 2010, information about a new share issue from Inpex Corporation leaked from one of the issue’s underwriters to a junior portfolio fund manager on Chuo Mitsui’s Japan Long Short fund (Nomura, one of the underwriters alongside Mizuho, Goldman Sachs and JPMorgan, expressed “regret” over the incident). The manager promptly dumped his 90 Inpex shares and went short 60, adding another 60 to his short position a week later.
The manager has been suspended, the fund contained seed capital but no client money, the positions amounted to a few hundred euros, and the fine is only ¥50,000 (€450). Nonetheless, the newly-formed Sumitomo Mitsui Trust Bank (SuMI Trust) has committed to tough strengthening of its compliance structure “to prevent a similar recurrence”. The independent fiduciary risk management department will be in charge of the middle-office function, itself under direct control of the director in charge of compliance. Among other measures, meetings between fund managers and securities companies’ sales representatives will be prohibited and all fund manager phone calls with outside parties recorded.
The integration of Sumitomo Trust and Chuo Mitsui Trust catapults it into first place among managers of Asia Pacific assets with $602bn (€450bn) - significantly ahead of Mitsubishi UFJ Trust with $370bn. SuMi Trust would enter IPE’s 2011 ranking of the Top 400 Asset Managers in 21st place.
But that scale also extends organisationally: SuMi Trust will have 32 analysts covering Japanese stocks and 14 more covering Asia ex-Japan. That is, as fiduciary business division CEO Akio Otsuka says, “one of the largest research forces among our peers”. A lot of information flows through the new institution because fundamental bottom-up management is at the heart of what both legacy businesses do - and surveys of buy-side research, such as that conducted by the Mizuho Research Institute, have regularly rated both businesses highly.
SuMi Trust clearly wants to preserve this situation. It is the foundation for many of the synergies of the deal: while both offered strong Japanese equity capabilities, the two legacy businesses served very different client bases thanks to Sumitomo’s speciality in value and Chuo Mitsui’s in growth. More importantly, it sees Japan as an alpha-rich environment for bottom-up stockpicking.
“The reason SuMi Trust supports such a large team of equity analysts is that we believe that proprietary research works particularly well in Japan,” says Otsuka.
More than 70% of Japan’s market is made up of sectors like capital goods, consumer goods and services, technology, healthcare and communications, where individual firms exhibit a greater level of performance dispersion, he explains.
“By contrast, markets such as China’s, Australia’s or Hong Kong’s, dominated by sectors such as finance, oil and gas, materials and public services, tend to move in tandem with the macro environment and show higher correlations between individual companies as a result.”
SuMi Trust will start life with $80bn in indexed and enhanced-indexed Japan equities, $4bn in Japan fundamental growth, $3bn in Japan fundamental value and $400m in Japan long/short equity market neutral. But there will be much more to the business than Japanese equity. Those 14 analysts working on Asia ex-Japan stocks will generate ideas for a $400m Asian active-equity strategy which opens up more markets for its bottom-up, research-driven culture. Otsuka points to principal components analysis of the variance of Asian equities which suggests that only 42% can be explained by global, country and sector factors - leaving 58% driven by idiosyncratic company risk.
“Investors in Asian equities have, so far, pursued top-down themes,” he says. “However, we believe that we are moving into a period in which our bottom-up investment style will work much better as these markets become more oriented towards patterns of domestic consumption.”
Asian and Japanese equities constitute what SuMi Trust calls its ‘product-out’ strategy - which sees it address international clients as a ‘boutique’ manager. Alongside this, it pursues a ‘market-in’ strategy - offering Japanese clients an ‘open-platform’, ‘multi-product’ access to a variety of strategies, managed by international partners.
It currently maintains a number of relationships covering a range from managed futures with Man Group to credit with BlueBay, and including names such as BarCap, Barings, Neuberger Berman and Wellington. The trust has taken minority equity stakes in two partners - equity boutique NewSmith, and fund of hedge fund provider FRM.
In exchange for exclusive marketing rights for these partner’s products in Japan, the firms get access to SumiTrust’s enviable network of Japanese clients: $450bn of its assets are from Japanese pension funds, including one-fifth of the equity portfolio of the $1.4trn Government Pension Investment Fund; 79% of the active assets of its flagship funds originates with investors who retain consultants. As examples of benefits from the relationship, FRM has enjoyed $4bn of inflows from Japanese pension funds and Man Group, $2.2bn.
While it is important to SuMi Trust that it finds partners it can work with closely, it is also looking for distinct strategies to perform specific roles in client portfolios. The trust took minority stakes in FRM and NewSmith because that “values their freedom and independence” more than an outright acquisition would, says Otsuka.
“Our approach is essentially to go to the customers first and ask them ‘what are you missing in your portfolio?’” says Otsuka. “We think of investment strategies according to four quadrants, each of which is best suited to a certain market environment. If a customer is missing one of these quadrants we will look for a solution that fills that space in their portfolio.”
Otsuka hopes that the merger will boost efforts to expand SuMi Trust’s capabilities in Asian equities, but also its assets from international investors. So do these relationships work both ways? Does SuMi Trust exploit its partners’ client networks in their domestic markets?
That really only happens with Standard Life Investments - Chuo Mitsui is adviser to the UK manager’s $3bn Japanese equity fund and, as a result, Chuo Mitsui brings about two-thirds of the €1.4bn of the assets that SuMi Trust manages for European investors today. Otsuka would like to work the 40% equity stake in NewSmith harder for its local client network. But Sumitomo’s share of the new trust’s European assets has been built through direct contact with institutions such as German pension funds, and Otsuka aims to build on that with further penetration of the European and wider EMEA consultant and intermediary channels. He points to a leading multi-manager platform’s $300m allocation to SuMi Trust’s Japan growth strategy as the template.
“The strategy is to compete on an equal footing with Nomura Asset Management with the help of the human resources efficiencies that come as a result of the merger,” he says.
The sheer size of the new operation will ensure that SuMi Trust will be difficult for EMEA investors with an appetite for Asian equities to ignore. Its challenge now is to exploit that scale efficiently - and manage its attendant risks.