Asset management integration
05 November 2014
Yasutoshi Kaneko of the Nomura Research Institute tracks the trend of asset managers in Japan turning towards BPO and BCP services
Image: Shutterstock
The Japanese asset management industry has reached significant milestones and continues to grow. As a result, fund managers in Japan must find a way to catch-up with their peers across the globe, while still maintaining efficiency and managing costs.
The industry is facing pressures from the competitive landscape introduced by foreign asset managers in the unique Japanese market, the push to further enhance fund performance and from the complex requirements introduced through the various stakeholders, including regulators, investors and the parent companies of various financial groups involved.
In response to these pressures, many foreign managers in the region are rethinking their operations and have shifted the traditional views on business process outsourcing (BPO) and business continuity planning (BCP) services and are examining how best to work with providers located in Japan.
Unique regional framework
The asset management industry in Japan boasts a unique framework that has previously been very attractive due to market size, but not very cost efficient for participants. However, the environment is constantly evolving, significantly affecting the business choices made by foreign managers as a result of recent market changes. For example, the Government Pension Investment Fund (GPIF) in Japan, the largest pension fund in the world, is reforming its system to increase its reserve. GPIF surprised the market by electing to allocate solely foreign investment managers for bottom-up research and management of active funds when selecting mangers in the spring of 2014. This shift was a landmark change for the industry, as Japanese asset managers believed that they had competitive edge of Japanese equity products.
Regulatory changes continue to impact the industry as well, especially after the financial crisis, as regulations imposed upon banks now affect subsidiary asset managers. These mandates are calling for stronger governance while investors are simultaneously requesting better transparency on banks’ investments.
Despite these region-specific characteristics, the Japanese capital market is very open for interested foreign players to enter. If an asset management firm does not have an office located in Japan, they are still allowed to participate in opportunities within the region, such as cross-border funds or sub-advisory services. This participation is often beneficial for asset managers in terms of cost savings. For example, cross-border funds are not required to adhere to UCITS standards, which would otherwise be much higher in cost for the fund.
Additionally, Japanese investors have strict standards for their investments and demand a high quality service from their asset managers, making business and operational accuracy a critical component for success.
Global focus on BCP and BPO services
Even though foreign managers without Japanese subsidiaries can easily access the market, there still exist remarkable reasons for them to have entities in Japan in terms of client services. However, as foreign managers begin working in Japan, it will be important to carefully review how they position their offices in the region. As the institutional investment industry increasingly operates on a global scale, asset managers are more often subject to regulatory pressures from foreign entities. Many asset managers in Japan are working under a larger financial group’s umbrella, such as a bank or broker-dealer. Similarly, foreign asset managers in the country are usually part of a larger global asset management firm or a large western financial group’s asset management arm.
Regulatory changes put in place as a result of the US financial crisis have also affected asset managers in Japan, especially regarding outsourcing and BCP. Asset managers are required to have much tighter governance over the third party firms they work with, including IT and BPO services, and business sustainability must be taken into account for those firms, as well.
For the smaller independent asset management firms in the US, this regulatory pressure may not apply as they operate in domestic markets and may fly under the regulatory radar. Larger, globally focused US asset management firms should take heed, however. Global financial institutions continue to heavily influence the operations of the non-banking industry and shadow banking, and asset managers will likely have more influence on the market overall.
As such, asset managers in Japan that are putting a high priority focus on BPO and BCP practices could prove to be industry leaders in this space, providing a best practice framework for US-based firms operating in this region. The Japanese market has the largest pool of assets under management in Asia and the labour fee in Japan has not risen in past decades, which could entice investors and foreign managers to execute more business in the region and bring more focus to the business practices there. These managers that may find themselves in the spotlight are starting to rely on the expertise of dedicated BCP and outsourcing offerings so that they can reallocate their resources back to their core business operations and focus on client services, while effectively managing their overall costs.
BCP is becoming an important discussion point for firms focusing on enhancing their client services and reliability, and BPO services are the key components for taking successful action in that direction. By utilising BPO, asset managers can effectively achieve their BCP goals through a more efficient, simplified process.
In order to sufficiently engage with the complicated Japanese asset management industry, foreign managers are looking to enlist business partners located in Japan to help manage the cost effectiveness, regulatory changes and unique local nuances of their business operations.
More recently, BCP and BPO services have piqued significant interest for foreign managers within Japan. By providing these services through firms located in the country, foreign managers benefit from expertise generated by past experiences that have served to build better and stronger solutions
The industry is facing pressures from the competitive landscape introduced by foreign asset managers in the unique Japanese market, the push to further enhance fund performance and from the complex requirements introduced through the various stakeholders, including regulators, investors and the parent companies of various financial groups involved.
In response to these pressures, many foreign managers in the region are rethinking their operations and have shifted the traditional views on business process outsourcing (BPO) and business continuity planning (BCP) services and are examining how best to work with providers located in Japan.
Unique regional framework
The asset management industry in Japan boasts a unique framework that has previously been very attractive due to market size, but not very cost efficient for participants. However, the environment is constantly evolving, significantly affecting the business choices made by foreign managers as a result of recent market changes. For example, the Government Pension Investment Fund (GPIF) in Japan, the largest pension fund in the world, is reforming its system to increase its reserve. GPIF surprised the market by electing to allocate solely foreign investment managers for bottom-up research and management of active funds when selecting mangers in the spring of 2014. This shift was a landmark change for the industry, as Japanese asset managers believed that they had competitive edge of Japanese equity products.
Regulatory changes continue to impact the industry as well, especially after the financial crisis, as regulations imposed upon banks now affect subsidiary asset managers. These mandates are calling for stronger governance while investors are simultaneously requesting better transparency on banks’ investments.
Despite these region-specific characteristics, the Japanese capital market is very open for interested foreign players to enter. If an asset management firm does not have an office located in Japan, they are still allowed to participate in opportunities within the region, such as cross-border funds or sub-advisory services. This participation is often beneficial for asset managers in terms of cost savings. For example, cross-border funds are not required to adhere to UCITS standards, which would otherwise be much higher in cost for the fund.
Additionally, Japanese investors have strict standards for their investments and demand a high quality service from their asset managers, making business and operational accuracy a critical component for success.
Global focus on BCP and BPO services
Even though foreign managers without Japanese subsidiaries can easily access the market, there still exist remarkable reasons for them to have entities in Japan in terms of client services. However, as foreign managers begin working in Japan, it will be important to carefully review how they position their offices in the region. As the institutional investment industry increasingly operates on a global scale, asset managers are more often subject to regulatory pressures from foreign entities. Many asset managers in Japan are working under a larger financial group’s umbrella, such as a bank or broker-dealer. Similarly, foreign asset managers in the country are usually part of a larger global asset management firm or a large western financial group’s asset management arm.
Regulatory changes put in place as a result of the US financial crisis have also affected asset managers in Japan, especially regarding outsourcing and BCP. Asset managers are required to have much tighter governance over the third party firms they work with, including IT and BPO services, and business sustainability must be taken into account for those firms, as well.
For the smaller independent asset management firms in the US, this regulatory pressure may not apply as they operate in domestic markets and may fly under the regulatory radar. Larger, globally focused US asset management firms should take heed, however. Global financial institutions continue to heavily influence the operations of the non-banking industry and shadow banking, and asset managers will likely have more influence on the market overall.
As such, asset managers in Japan that are putting a high priority focus on BPO and BCP practices could prove to be industry leaders in this space, providing a best practice framework for US-based firms operating in this region. The Japanese market has the largest pool of assets under management in Asia and the labour fee in Japan has not risen in past decades, which could entice investors and foreign managers to execute more business in the region and bring more focus to the business practices there. These managers that may find themselves in the spotlight are starting to rely on the expertise of dedicated BCP and outsourcing offerings so that they can reallocate their resources back to their core business operations and focus on client services, while effectively managing their overall costs.
BCP is becoming an important discussion point for firms focusing on enhancing their client services and reliability, and BPO services are the key components for taking successful action in that direction. By utilising BPO, asset managers can effectively achieve their BCP goals through a more efficient, simplified process.
In order to sufficiently engage with the complicated Japanese asset management industry, foreign managers are looking to enlist business partners located in Japan to help manage the cost effectiveness, regulatory changes and unique local nuances of their business operations.
More recently, BCP and BPO services have piqued significant interest for foreign managers within Japan. By providing these services through firms located in the country, foreign managers benefit from expertise generated by past experiences that have served to build better and stronger solutions
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