Strategically Speaking: Nikko Asset Management
From a European perspective the story of Japanese finance over the decades seems to be one of dramatic rise followed by spectacular fall. In the late 1980s, it was widely argued that Japanese institutions were about to dominate global finance. Those were the days when the Nikkei 225 index almost touched 40,000, compared with about 16,500 at present, and the grounds of the Imperial Palace in Tokyo were said to be worth as much as the state of California.
Nowadays, discussions about Asia focus overwhelmingly on China. Japan, when it is mentioned, is usually an afterthought. Apart from a few niche investors there is relatively little interest from foreign investors in Japanese equities or fixed income.
In retrospect, it should be clear that both viewpoints are an overreaction. Although Japanese institutions were formidable in the late 1980s, they were a long way from eclipsing everyone else. And while the recent rise of China is indeed dramatic, it should not be forgotten that Japan is still the world’s third-largest economy. Germany, Europe’s largest economy, is still behind Japan by a substantial margin.
The Nikko name has certainly had its share of trauma over the years. In the 1980s Nikko Securities was one of the big four Japanese brokers. In subsequent years it found itself enveloped in troubles – mostly not of its own making – on both sides of the Pacific. In the early 2000s a Nikko subsidiary found itself in trouble when it turned out it had substantial exposure to the bonds of stricken US-energy company Enron. When the news broke the Japanese firm suffered lots of redemptions.
Nikko’s asset management operations were once owned by Citigroup, the US financial giant, that got into its own well-publicised troubles on Wall Street in 2008. Shortly afterwards, in 2009, Sumitomo Mitsui Trust Bank (then Sumitomo Trust) took a large stake in the firm.
Of course, Nikko’s previous problems are not the responsibility of the present leadership. That would be like blaming someone for the misfortunes of their ancestors and their associates. Nikko Securities ceased to be a shareholder in 2009. But the troubled past has meant that the current management has had to rebuild the firm into a fundamentally different type of institution.
It is one suggested by the firm’s favoured tagline of ‘Asia’s premier global asset manager’. That is, it is an Asian fund manager – rather than just a Japanese one – with a global focus. Although its headquarters remains in Tokyo it has worked hard to extend its regional reach. In 2011 it acquired Tyndall Investments in Australia and New Zealand as well as DBS Asset Management in Singapore. Both have since taken on the Nikko name. The Singapore deal involved the subsidiaries’ former parent DBS Bank getting a 7% share in the enlarged group. As part of the deal the two firms agreed a non-exclusive distribution agreement. In addition, Nikko took stakes in Malaysian Hwang Investment Management and Asian Islamic Investment Management.
Nikko also has minority stakes in firms in two of Asia’s largest economies. In 2007 it acquired a 40% stake in China’s Rongtong Fund Management and in 2012 it took a 49% stake in Ambit Investment Advisors of India.
It has also acquired an Asian equities team (Treasury Asia Asset Management, based in Singapore and Sydney) and a global equities team (a former SWIP team based in Edinburgh) over the years.
The appointment of David Semaya as executive chairman in 2014 was in line with the goal of making Nikko more Asian and global. He has spent his career in the US, the UK and Japan. Semaya is fluent in Japanese, widely regarded as one of the most difficult languages to learn.
Semaya’s responsibilities include corporate governance and strategy. He sits on all of the firm’s boards as well as those of its joint-venture partners. So he is at the forefront of the firm’s global expansion.
Semaya joined an already international leadership team. Takumi Shibata, the president and CEO, has spent much of his career outside Japan. Yu-Ming Wang, one of two deputy presidents, studied in the US and is fluent in Mandarin Chinese. The regional businesses and affiliates are generally run by locals, rather than by Japanese.
Semaya’s recruitment coincided with a shift from what he calls a multi-local strategy to a global one. “This is a scale business and we had expertise sitting in various locations around the world,” he says. “We were not disregarding local client service or local content needs but leveraging them”.
He describes Nikko as having an almost “outsourced model” in which its local investment boutique businesses have significant autonomy. “We operate in boutiques around the world with a risk management backstop and centralised dealing.”
Semaya says the group is increasing its commitment to Europe where it hopes to sell more of its specialist products. The appointment of Udo von Werne as European CEO is a sign of its ambitions. The former Pictet man will have all-round regional responsibility for investment, the manufacturing of products, the middle and back office and strategy.
But Nikko’s products will have a strong Asian flavour. “We are an Asian-rooted global asset manager,” says Semaya. As well as Japanese equities its offerings include Asian equity and fixed income, an Australia and New Zealand fixed-income capability and a Chinese renminbi bond fund.
Not all of Nikko’s offerings relate solely to the Asia-Pacific region. There are other specialist capabilities that might be of interest to European asset owners. These include a fund launched in 2010 that invests in World Bank green bonds and an emerging markets multi-asset fund. The latter is unusual with its top-down focus on geopolitical risk. It is run in partnership with the Eurasia Group, a specialist risk consultancy.
Finally, Nikko hopes to build on its experience of exchange-traded funds (ETFs) in the Japanese market, where it says it is the second largest provider, to offer products in Europe. Such ETFs are already open to European asset managers and Nikko is in the process of obtaining permission for pension funds to use them in different jurisdictions.
Nikko Asset Management is far removed from the institution it was just a few years ago. It has moved from being an overwhelmingly Japanese company to one with a strong Asian presence. More recently it has attempted to expand globally, albeit with a strong Asian flavour. The challenge now is to live up to the identity it has created for itself.