The perils in the acquisition are considerable in Japan, where the BGI franchise has more to lose than to gain
In Asia Pacific, nowhere are the stakes in BlackRock's $13.5 billion acquisition of Barclays Global Investors bigger than in Japan. BlackRock will be buying a franchise that is the biggest manager of corporate pension money, as well as a significant manager of public fund assets. BGI's business model, however, is generic and already replicated by domestic trust banks, which can be expected to pounce on BGI's clients.
But if it succeeds in creating genuine synergies, the deal could have a transformational impact on the structure of Japan's asset management industry. It comes at a time when Citi is shopping around its stake in Nikko Asset Management, and together the deals raise questions about the role of independent asset managers in Japan.
"The BGI sale raises questions as to whether banks and securities companies really need to also own an asset management company," says one CEO at a domestic money management firm.
But first, the deal itself. The BGI franchise in Japan is amazing, but there is a real possibility that BlackRock has acquired a business at its peak in this market.
How big is BGI? It is the largest global fund manager in Asia Pacific, according to AsianInvestor magazine. As of September, BGI sourced $204 billion of assets from clients in the region, both retail and institutional, a figure that is likely to be smaller today. Only two Japanese firms raise more assets from the region, Mitsubishi UFJ Trust & Banking and Nomura Asset Management, thanks to their powerhouse distribution in Japan.
And like those other two firms, most of BGI's business is from Japanese institutions, which are big users of passive investment strategies, which is BGI's forte. Although BGI likes to talk about its active and quant capabilities, and has enjoyed growth in Asia ex-Japan and in its ETF business, Japan still accounts for around 9% of its global business, versus only 1% or so for the rest of Asia. And that business is mostly managing money for either the Government Pension Investment Fund (GPIF), the massive $1.5 trillion public fund, or for corporate defined-benefit schemes.
The GPIF currently allocates 70-80% of its investments to passive exposures.
According to Hong Kong-based Japan Pensions Industry Database, BGI runs $145 billion of Japanese DB assets as of March 2008, which makes it as big as the next three players (Nomura, Diam and Tokio Marine Asset Management).
Although the institutional market in Japan is shrinking, providers of passive investment services are doing well. Corporate plan sponsors are removing risk post-Lehman Brothers collapse by shifting to passive, particularly as they rebalance asset allocation back towards their strategic policy levels (which means buying equities). A lot of active fund houses are getting fired as a result, with trust banks the main beneficiaries.
Although there have been plenty of mergers among Japanese banks, they tend to leave existing teams in place, to the point that entire systems and processes go untouched. Although this doesn't make big Japanese banks efficient, the stability of client interfacing is a competitive advantage. Plan sponsors get nervous when foreign houses engage in M&A because they don't know who's working for them anymore. It is a sure bet that domestic trust banks will use the BlackRock/BGI deal as an excuse to try to wean some of those passive mandates. Even if the new entity (to be called BlackRock Global Investors) successfully defends its turf, what are the limits to market share it can continue to win over, say, a three-to-five year horizon?
As for the GPIF, it is slated for reform, with the government planning to break it up into smaller groups that compete among one another, which should produce better returns. Part of the GPIF may be recast as a sovereign wealth fund. This implies some passive mandates will be cancelled over time.
Nonetheless, even if BGI loses some business, this is still a big deal for the industry in Japan. BlackRock already sources around $50 billion in assets from this market, mostly from institutions. Its business lines are quite different, however, with a focus on risk management solutions, active strategies and innovation. Combined, the new entity will source some $200 billion from Japan, putting it on par with the likes of Mitsubishi UFJ Trust and Nomura Asset Management.
Most importantly, this will be the first time the market has a player of such scale that is also independent. Asset management in Japan has been all about banks and securities companies using their distribution power to flog products from affiliated manufacturers, at both the institutional as well as the retail level. The lack of independent asset managers of size has contributed to the slow development of the industry, and has allowed fund managers to get away with shoddy performance and mediocre service. Because the action has always been at the parent company level, asset management has not attracted the best and the brightest in Japan.
If, however, BlackRock Global Investors can create an effective merger of its businesses, which on paper are complementary, then it will be in a position to not only make money but raise the bar for the industry.
"We will see more independent asset managers -- if they can secure distribution," says a domestic fund house CEO who is watching the deal closely.
BlackRock has taken the mantle for independent asset management from Nikko Asset Management, which is under the leadership of two Americans with deep experience in the Japanese asset management industry, Tim McCarthy and Bill Wilder. Their plan had been to list Nikko AM, thereby putting it on its own two feet, independent of Citi or Nikko Cordial.
Now, with Citi looking to offload its position, and with events having scuppered two attempts at an IPO, there is a new host of questions about whether Nikko AM can ever become a viable, independent asset manager.
Meanwhile, what is BlackRock's vision for its own business in Japan? Hiroyuki Arita, president and representative director in Tokyo, met with AsianInvestor last week. He would not comment on anything related to BGI, which had not yet been formally announced. But he does predict consolidation among asset managers in Japan, which should promote independence, create scale to pay for expensive things such as IT and compliance teams, and also let them hire people with more talent.
One of Arita's first decisions upon assuming this role last year was to shift the firm's retail focus away from brokerages, given the firm doesn't have the brand and the salesforce to compete with the likes of Nomura or Diam. Now it is building relationships with banks instead to promote itself as a sub-advisor, and has converted its marketing strategy from appealing to customers directly to a business-to-business footing.
Arita says that in recent years BlackRock's Japan AUM from retail has fallen from 30% to 10% of its business. But over time he believes this offers the best arena for growth, noting that only 4-5% of the $15 trillion of household savings are with investment products.
For the institutional business, where the pie is shrinking, he says BlackRock's strength is in fiduciary outsourcing, liability-driven investment solutions and multi-asset products, none of which are established in Japan. The idea is to not just chase mandates but to consult with clients on fundamental questions such as benchmarking and asset allocation. Late last year the firm hired a consultant from Watson Wyatt to spearhead this effort. (Several other foreign firms are also trying this approach, including BGI, AllianceBernstein, Goldman Sachs and JP Morgan.) If there is one area where synergies with BGI could pay off the most, it may be in building a consulting capability.
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