As inflows to foreign equity toshin have become more pronounced, more attention is being paid to the role of subadvisors. Most of the top foreign equity funds employ subadvisors, making them increasingly integral to toshin business. The article below* explores the current and future role of subadvisors in Japan.
*Abridged from an article originally published in Ma-Do, a magazine for Japanese financial retailers, vol. 61, February 2021.

“Sophistication of the asset management business” is a hot topic in Japan since the Financial Services Agency (FSA) released its “Progress Report on Enhancing the Asset Management Business 2020” last June.  In the eyes of the FSA, management capability in Japan needs to be strengthened.  Using subadvisors is one way to enhance that capability.  Many of the world’s leading assets managers have served as subadvisors in Japan’s toshin market, but it is only with the recent success of foreign equity funds that their role has drawn much attention. 

Shoko Shinoda, Fund Analyst of Rakuten Securities Inc. said, “Due to the excessive focus on cost in the last few years, subadvisors have been regarded as a cost-increasing factor.  With the recent stock market strength, however, investors have realized that performance outweighs cost.  Funds that have performed well, such as Baillie Gifford and ARK, have attracted attention and, as a result, the importance of subadvisors is being recognized.”  Shinoda identifies two types of subadvisors in Japan: 1) asset managers who offer their own products and serve as subadvisors (provider and subadvisor), such as Goldman Sachs and JP Morgan; and 2) asset managers who act only as subadvisors, such as PIMCO.  Another well-known subadvisor, T. Rowe Price, used to operate as type 2 but has since become type 1.

Shoko Shinoda

Mitsubishi UFJ Kokusai Asset Management (MUFGAM) has AUM in outsourced funds of more than JPY 3 trillion with over 50 subadvisors.  “We have our own foreign asset management products, but it is important to corporate with other asset managers to provide investment opportunities in niche asset classes and newly emerging theme products for our investors and retailers.  It is essential to offer products that differentiate us from other companies as market conditions dictate, as in the current investment climate of low interest rates and a dramatically changing stock market, ” said  Mamoru Oizumi, Senior Deputy General Manager of Product Development Division.  Yasuo Sasai, General Manager of Sub-Advised Fund Management Division, added “Honestly speaking, it is difficult for domestic asset managers to manage foreign assets with a bottom-up approach and continuously earn positive returns.  It is beneficial for us to outsource the operation to local foreign players or invest in them as a fund of funds.”

Domestic asset managers act as gate keepers, who must select asset managers and management strategies from an expansive field that includes everything from gigantic global managers to specialized boutique managers.  How do they choose? 

MUFGAM uses 5 criteria:  corporate management (How well-run is the company?); asset management capability; an administration capable of stable operations; compliance; and supply of information.  Asset management abilities are reviewed using a detailed qualitative assessment and close examination of the investment team and process. 

Yasuo Sasai

According to Sasai, the soundness of the investment process is assessed by looking at RFP (request for proposal) responses.  Proposals aren’t necessarily implemented, however.  “Only by interviewing many people about the details can you know if a particular investment process is well thought out or not.”  

For qualitative assessment, repeatability is important.  “You may have performed well recently, but it’s more important to be able to repeat that success consistently.  The likelihood of repeated success depends on whether results are achieved through an appropriate and logical process,” says Sasai.  “Differentiation in investment strategy is another a key factor in evaluating a subadvisor because you cannot outperform by using the same strategies as other asset managers.  It’s not enough simply to be different, though, as that can produce negative results.”  A strong and stable process is highly valued, but flexibility is also required to adjust to changes in the environment.  Such conflicting considerations have to be taken into account when assessing investment skills, which is why a gate keeper's judgment is necessary.

Continual monitoring is as important as the assessments at the door.  At MUFGAM, contracts executed by subadvisors are reviewed daily to verify if they conform to investment policies.  Performance is reviewed weekly, monthly, and quarterly and compared with market movements.  An RFP is sent to subadvisors at least once a year to determine whether to continue their service contracts.  “As a gate keeper,” says Oizumi, “we not only assess performance but also encourage improvement, such as in the content and speed of reports produced when the market is changing rapidly.”

Mamoru Oizumi

Quite a few active funds performed better than index funds last year, and some of them generated considerably higher returns.  Shinoda noted that “Cutting off active funds based merely on cost is easy and goes against the effort to increase sophistication of the asset management industry.  We now need discussions around how to evaluate active funds fairly.”  The focus on active funds will likely increase this year, as will the focus on subadvisors and their increasingly important role in the toshin market.


< Toshiaki Kikuchi >