Building an Asset Management-Led Nation: Key Takeaways from FinCity Global Forum and Tokyo Asset Management Forum 2024

Excitement over Japan’s plans to architect an ‘Asset Management-led Nation’ was palpable at the FinCity Global Forum and Tokyo Asset Management Forum, two of FinCity.Tokyo (東京国際金融機構) 's flagship events which were held over the course of a single day on 31 January.

Over the last six months, the sense of optimism has snowballed as Prime Minister Kishida and the Financial Services Agency unveiled a series of reforms focused on upgrading the asset management industry, including promoting the creation of an Emerging Managers Program (EMP) to drive investment into small-but-distinctive asset managers.

We would like to thank the 25+ experts, from political leaders and academics to asset owners and emerging managers, for shedding light on many recent developments through their discussion and debates of how best to implement reform.

The morning kicked off with discussions of Japan’s plans to embrace EMP, how this aligns with asset owners’ evolving priorities, and culminated with a showcase of six Japan-based emerging managers. Over the afternoon, our experts delved into the reasons why Tokyo is at an inflection point in its economy and investment, such as the surge of foreign investment and the raising of tax-exempt investment limits for retail investors, plus plans to enhance the diversity of the asset management industry under the leadership of ‘Asset Management Samurai’.

Although both events were well-attended with more than 200 in-person participants and over 350 online at FinCity Global Forum, for those who did not have the chance to attend, we have put together a summary of the day’s highlights below. Please enjoy, and we hope to see you there next year!

An evolving investment landscape for asset owners

According to opening remarks by Keiichi Aritomo , FinCity.Tokyo’s Executive Director, a recent survey of global asset allocators, including pension funds, university endowments, and sovereign wealth funds from the US, Europe, and Asia, found that 100% of asset owners surveyed were interested in Japan-based emerging managers, particularly those offering equity long-short and growth equity strategies. The asset owners surveyed by FinCity.Tokyo (東京国際金融機構) said that the most important criteria for manager selection was the background of the management team and the uniqueness of their strategy rather than their track record.

GPIF and other prominent Japanese asset owners are moving away from industry conventions such as the track record requirement, which often leads boutique asset managers to be excluded from allocations. Instead, GPIF is now using data-driven methods to find and allocate towards outperforming managers with the potential for high returns, said keynote speaker Sadayuki Horie , Representative Director of Horie Research & Advisory and Non-Executive Director of Mitsubishi UFJ Asset Management.

The return of inflation has challenged the “low-risk, low-return” status quo among corporate pension funds, said Mr Horie. This has led regulators to question whether “what has been done in the last 20 years will remain optimal”, an issue that is also being considered by the FSA in its new ‘Asset Ownership Principles,’ to be elaborated on this summer.

Encouraging allocation to Japan-based emerging managers could benefit the economy as a whole by unleashing a wave of growth capital into the country’s pool of underfunded SMEs, said FinCity.Tokyo’s Chairman and former Deputy Governor of the Bank of Japan, Hiroshi Nakaso. In his keynote speech, Mr Nakaso noted that while it is crucial for emerging managers not to be excluded by asset owners based on their track record, more data needs to be made available about emerging managers to make them investable.

The Emerging Managers Showcase

FinCity.Tokyo (東京国際金融機構) has been cataloguing Japan’s emerging managers, and selected six examples of outstanding emerging asset management businesses to showcase at Tokyo Asset Management Forum.

Diverse strategies ranging from technology innovation to equity engagement and sustainable impact investing were showcased through inspiring presentations from Naohide Une , CEO at Investment Lab Co; Katsunori Tanaka , CIO at Ariake Capital; Tokihiko Shimizu , Founding Partner at Fiducia Inc; Kaz Sakamoto , Co-Founder and President at Cadira Capital Management, on its first trading day; Masaki Gotoh , Partner at TriVista Capital; and Makiko Sato（Shigematsu） , Representative Partner at iSGS Investment Works. We would like to thank each of these exciting asset management firms for sharing their vision, and we look forward to following their development in the years to come.

The Emerging Managers Showcase selected companies through a screening process spanning the universe of 91 emerging managers, looking at their operational abilities and distinctiveness of strategy. Secondary considerations were then applied, such as the managers’ reputation within the industry, communication and sales abilities, and their focus on solving social problems.

Before the showcase, FinCity.Tokyo’s Special Adviser to EMP, Hidekazu Ishida 石田英和 gave an introduction in which he compared investment activity to cormorant fishing, as it relies on the trust between fishermen and their cormorants in order to find fish. Similarly, asset owners entrust their assets to the investment abilities of their asset managers, in order to find financial returns. Participants in the subsequent asset allocators panel spoke of the many benefits that asset owners enjoy from employing emerging asset managers.

The case for allocating to emerging managers

“Performance is the number one purpose always” of allocating to emerging managers, said Kirk Sims, CFA , the Managing Director of Emerging Managers Program at the Teacher Retirement System of Texas’ Investment Management Division.

On average, there is a size premium and age premium in public and private markets, which supports allocating to emerging managers for higher returns, said Professor Sam Y Chung, Member of the Investment Policy Committee at the Korea National Pension Services & Head of the APAC division of AIF, a US-based alternative investment think-tank.

Mathieu Klein , Co-CIO at NewAlpha Asset Management, added that there is great diversity within the emerging manager universe, and that allocating towards emerging managers can allow asset owners to “access diverse sources of alpha that cannot be accessed by large managers because of capacity issues”.

Another benefit is that smaller managers often have more contact with asset owners, said Mizuha Suzuki , Investment Manager at London-based family office, Kenjiro Private Office Limited, which leads to “deeper relationships''.

Mr Sims added to this that early-stage investment “means something” to emerging managers, and that “once they are bigger, they will still take your calls.” He explained that TRS’s Emerging Managers Program makes average allocations of USD$20-30mn toward emerging managers, with the aim of “graduating” to the main portfolio (average allocation of USD$300mn) after they have “matured” in the programme.

Why Tokyo is at an Inflection Point

After lunch, Mr Nakaso delivered a keynote speech to FinCity Global Forum, saying that the Japanese economy had reached an “inflection point”, exiting a decades-long deflationary trend. Meanwhile, Japan Exchange Group has upped the pressure on listed companies to publish capital performance improvement plans. Investment has surged, with foreign investors buying JPY￥6.2 trillion of Japanese stocks between March and June 2023 - higher than the JPY￥5.7 trillion they bought in the 18 weeks following the announcement of Abenomics. At the same time, global asset managers are looking to take full advantage of market opportunities in country, with Impax Asset Management and Investcorp opening offices in Tokyo last year, and US investor Ares planning to open an office in 2024.

“In all continents, all investors overseas have an unbelievable interest in Japan now,” said Executive Chairman and Representative Director of Sumitomo Mitsui Trust Asset Management, David S. in the next panel session discussing the outlook for Tokyo as a global financial city. In his frequent business trips to Europe, the Americas, and across Asia, Mr Semaya said that he had not seen a level of interest in Japan so high since 1987, adding that the quantity of recent inflows shows that “it isn’t just about talking anymore.”

Another panelist, Hiroo Ichikawa, who is Executive Director at The Mori Memorial Foundation, noted that Tokyo has maintained its position in the Global Power City Index ranking of Financial Centers, as 1st in Asia, and 3rd in the world behind London and New York. One of Tokyo’s strengths is the size of its asset owners, said Mr Ichikawa. Another fast-developing industry in Tokyo is fintech, added panel member Chie Ito , the Representative Director of fintech accelerator Finolab Inc. Since 2016, the yearly level of fintech investment in Japan has more than tripled to JPY￥90.8 billion in 2022, said Ms Ito.

The Governor of Tokyo, Yuriko Koike , in her opening remarks also called attention to Tokyo’s momentum as a center for startups, with plans to host a sustainable innovation-focused event named SusHi Tech Tokyo in April 2024.

Re-imagining asset ownership

Next, the State Minister of the Cabinet Office for Financial Services, Tatsunori Ibayashi’s keynote address emphasised the need for increased foreign investment to be matched by strong investment from Japanese households in order to create a “virtuous cycle” of growth.

More than half of household financial assets are held in cash deposits, amounting to JPY￥2,100 trillion, and the limits for the tax-exempt investment scheme (NISA) have recently been lifted in order to encourage more investment.

Asset managers and asset owners were keen to stress the importance of reforms to allow them to meet retail investors’ and beneficiaries’ evolving expectations. Despite the ESG backlash over the last few years, sustainability is still a key consideration for retail investors, said Takeshi Kimura , Special Adviser to the Board of Nippon Life Insurance, and Board Director at PRI, during a panel session entitled ‘Essentials for Reforming Asset Ownership’. Surveys show the majority of retail investors in Japan support ESG considerations being taken into account alongside other monetary considerations, said Mr Kimura. This has helped influence a ‘tectonic shift’ ongoing among institutional investors, with an increasing number looking to invest in ESG, sustainability, and impact-focused strategies.

From the perspective of asset managers, reforms are needed in order to better fulfil stewardship and engagement responsibilities in line with their ESG considerations. Nagahisa Miyabe, President and CEO of Legal & General Investment Management Japan, explained that his firm typically focuses on long-term engagement with portfolio companies to improve corporate value and promote social reforms. Mr Miyabe said that Japan’s current onerous guidelines around firms co-ordinating their engagements with other investors should be reviewed, as they are often an obstacle to effective engagement.

Another panelist, Adam Watson , Partner and Co-Head of Asia Pacific, Singapore at Partners Capital, said that Outsourced Chief Investment Officers (OCIO) can be a shortcut to upgrading asset owners’ investment capabilities across niche assets. Employing an OCIO can help asset owners gain access to alternative assets such as private equity, which can be a major source of alpha but small asset owners often lack expertise in, said Mr Watson. This perspective was also shared by the Financial Services Agency, which included OCIO in its list of asset ownership policy recommendations in December.

Cultivating innovators in asset management

Next, the Deputy Secretary-General and Special Assistant to the Policy Research Council Chairman of the Liberal Democratic Party, Seiji Kihara addressed the event.

Mr Kihara said that today, the biggest missing piece in the ‘New Form of Capitalism’ as proposed by the Kishida administration, is the enhancement of the asset management industry. This includes taking steps to allow more Japanese asset managers to establish and expand their AUM, while also establishing new English-only ‘investment zones’ in a bid to attract more foreign entrants to the industry. “By allowing new entrants, we can invigorate competition and existing players will be inclined to further strengthen governance and enhance their competence and expertise,” said Mr Kihara.

The final panel session of the day, entitled ‘Cultivating Innovators in Asset Management’ looked at how to make progress on shared industry challenges.

“The greatest challenge is a lack of diversity,” said Yoshio Hishida, President and CEO of Sumitomo Mitsui Trust Asset Management, noting that Japan’s major asset managers often engage in similar business and investment models. Mr Hishida added that collaboration between established and emerging asset managers will be important for growing the industry overall, noting that Sumitomo Mitsui Trust Asset Management has conducted seeding programs for emerging managers.

Managing Director, President and Representative Director of Morgan Stanley Investment Management (Japan), Masahiro SHUTO CMA, MRICS agreed with the need for diversity, in particular for capital to flow into a more diverse range of assets across public and private markets. This allows firms to “try different things, and come up with the best mechanisms”, said Mr Shuto.

Today, boutique asset management companies with distinctive models are becoming more visible and achieving greater scale in Japan. Hideto Fujino , the Representative Director, Chairman, President & CEO, Chief Investment Officer at Rheos Capital Works Inc, said that the road to growing his investment firm from inception in 2003 to its public listing in 2023, was “not smooth”. Today, Rheos Capital Works manages JPY￥1,255 billion of assets in its investment trust and investment advisory businesses. “The times are changing,” said Mr Fujino, who said he has high expectations for the current crop of emerging managers, thanks in part to the government’s support for the Emerging Managers Program in Japan.

Unlisted companies are like “aquatic mammals”, said Mr Fujino, fighting each other in the water for survival of the fittest. The winners make it out onto land - the public markets - where they start using their lungs to breathe and can eventually develop into large land animals, like elephants and lions. Currently many listed companies get stuck in an “amphibious” stage of development, like iguanas, lacking access to capital because they are no longer investable by venture capitalists and their size means they are ignored by institutional investors. Mr Fujino said that emerging managers can act as “iguana hunters”, seeking out and funding listed SMEs with significant growth potential.

The market opportunities for innovative managers in Japan are huge. FinCity.Tokyo’s Executive Director, Mr Aritomo noted that Tokyo boasts the second-highest number of High Net Worth Individuals of any city in the world, with over 290,000 residents worth over USD$1 million, behind only New York. While Tokyo has a vast quantity of investable assets, more could be done to encourage investment into financial instruments, according to President And Chief Executive Officer of AllianceBernstein Japan, Kazuko Sakaguchi. Ms Sakaguchi noted that a high proportion of Japanese personal assets are currently invested in real estate rather than in financial securities. By improving tax systems for investment assets, such as the recent raising of the NISA scheme’s tax-exempt limits, participation in capital markets by domestic investors could be boosted.

A generation of ‘Asset Management Samurai’

FinCity Global Forum came to a close with parting remarks from the Managing Director, Private Funds, and Representative Director of Brookfield Japan, Keiji Hattori .

Mr Hattori said that “many initiatives” have been launched since 2020 to develop Tokyo into a world-class international financial center and upgrade the asset management industry.

“This is different from a temporary stock market boom”, said Mr Hattori, noting that efforts to build sophistication in the industry will take time to bear fruit.

People will be the most important vector of progress, said Mr Hattori. He stressed the importance of financial education for high school students, in order to spread financial literacy. Among asset managers and asset owners, Mr Hattori said that there are already innovators - he calls them “Asset Management Samurai” - who have the imagination and agility to embrace change within their own organisations, and thus will play a leading role in convincing their colleagues and the wider industry to follow.

Thank you once again to all those who participated and helped make Tokyo Asset Management Forum and FinCity Global Forum a productive day, and we hope to see you again next year.