Posted on June 16, 2024
On June 3rd, the Cabinet Secretariat and the Secretariat of the Council of the New Form of Capitalism Realization presented a draft of the Asset Owner Principles. They will be put up for public consultation shortly, but as of June 12th, no schedule has yet been announced.
Why was the new principles formulated? Especially since a follow-up meeting has now been set up to review the Stewardship Code further, it is not surprising to wonder what the difference is between this principles and the code. Here, we want to understand by looking back at the background of the formulation of this principles.
Strengthening asset management capabilities, building an asset management nation
The development of the Asset Owner Principles is initiated based on the proposition of the "Policy Plan for Promoting Japan as a Leading Asset Management Center" as part of the Asset Management Nation, which was also announced by the Cabinet Secretariat in December last year. Going back even further, on June 16, 2023, the government adopted the "Basic Policy for Economic and Fiscal Management and Reform 2023" at a cabinet meeting and launched a policy plan called "Asset Management Nation". The main points are a fundamental reform of personal asset management and personal pensions such as NISA and iDeCo, a review of financial education and neutral investment advice, and improvements to the governance and strengthening of structures for asset management companies and asset owners. Despite the declining birthrate and aging population, and rising inflation rates worldwide, the proportion of investment in household finances in Japan is still low. Since it is difficult to live a comfortable retirement on national pensions and employee pensions alone, this initiative aims to give people the knowledge and motivation to invest, while at the same time strengthening the domestic asset management industry. In light of these government initiatives, the Financial Services Agency launched a task force on asset management in October 2023, and discussions were held swiftly until December. The task force's report listed the following initiatives as required to advance the asset management industry: promoting emerging asset managers (Emerging Asset Manager Promotion Program, Japan's version of EMP) and easing entry requirements while at the same time improving the investment management capabilities of major financial groups, improving governance and strengthening systems, and formulating principles for product governance. As for initiatives for asset owners, the initiative included the appropriate selection of investment products for final beneficiaries, the provision of proposals and information, the supply of growth capital (vitalisation of startups), and finally, financial education. However, many of these were not particularly new. These issues were also taken up in the "Progress Report 2023 for Enhancing Asset Management Business in Japan" (which rigorously analyses and evaluates the challenges facing Japan's asset management industry every year, and the 2022 edition also included supervisory expectations for ESG management), which had been published for the past four consecutive years until April 2023, and can be seen as an extension of that and a deeper discussion.
After the task force's report was released, FSA requested each financial group to proactively use emerging asset managers as part of a Japanese version of EMP and not exclude them simply because they have a short history of business. FSA also asked each company to announce its future response policy. On June 7, FSA published a list of “EMP-related efforts” by financial institutions that responded to the request and announced their response policies on its website.
Japanese version of EMP
Why is the government putting effort into emerging asset management companies?
The Progress Report on the Sophistication of the Asset Management Industry points out that the challenges facing Japan's asset management industry include "most are affiliated with financial institutions and there are few independents," "passive management is overwhelmingly prevalent, which tends to result in low profits for asset management companies, and they are not fully fulfilling the role expected of asset management companies in discovering corporate value or seeking to increase value through engagement with investee companies," and cites the need for policies to support emerging asset management companies and encourage further entry into the industry by global asset management companies.
As for why having few independents is bad, it is generally pointed out that there is a risk of a "conflict of interest" between affiliated financial institutions and customers, and such wording is also written in the Asset Owner Principles. However, it is hard to imagine that they would actually do anything against the interests of asset owners because they are subsidiaries of financial groups. Rather, I think that the main issue is that because they are subsidiaries of financial institutions, they are investing assets mainly within the group, which makes the scale of management smaller than overseas and may prevent competition from functioning properly. It is not unique to Japan that asset management companies are subsidiaries of financial institutions, and conversely, financial institutions need asset management departments. On the other hand, new asset management companies are generally just starting up, so the amount they can manage is small, and they are not replacing existing asset management companies. Nevertheless, the government and FSA are putting so much effort into this area that they are calling for a Japanese version of EMP and requesting that "financial groups" take on this initiative, and I think that this is due to a strong desire to further revitalize Japan's asset management industry.
Nomura Research Institute conducted a survey on the expectations of independent asset management companies from the end of December 2023 to the beginning of January this year, targeting people related to the domestic and overseas asset management industry. Expectations for independent asset management companies include "absence of conflicts of interest," "motivation," and "originality in management," while conversely, the weaknesses they consider to be are resources and scale of management.
Asset Owner Principles
In 2024, the Cabinet Secretariat of the Council of the New Form of Capitalism Realization began discussions on formulating the Asset Owner Principles. On January 23, Prime Minister Kishida sent a video message to the Global Macro Conference held by Goldman Sachs Group in Hong Kong, declaring that he would "advance reforms to asset ownership," and he has since sent similar messages at investor events. On April 19, the Nikkei reported the Progress Report for Enhancing Asset Management Business in Japan would not be published in 2024. The "Asset Management Reform Office" of FSA, which is thought to be the successor to the department that published the report, seems to be busy working hard to develop the Asset Owner Principles together with other ministries and agencies. The formulating principles involved ministries and agencies that have jurisdiction over institutions known as "asset owners," such as the Ministry of Finance, the Ministry of Health, Labor and Welfare, the Ministry of Economy, Trade and Industry, and the Ministry of Education, Culture, Sports, Science and Technology.
Based on the discussions so far on the Asset Management Nation, I thought that the document would have included a statement such as "Asset owners should actively select emerging asset managers for asset management," but there is no mention of such a statement. However, the principle No3 requires that "when entrusting asset management to financial institutions, etc., the most suitable asset manager should be selected while appropriately managing conflicts of interest." The supplementary principle under No3 states that "When selecting an asset manager, a comprehensive evaluation should be made, including not only past performance, but also the investment target selection philosophy and risk management methods. In this case, it is desirable to consider the capabilities and experience of the asset manager (including experience at previous asset management companies) rather than making a decision based solely on reputation and size. For example, it is important not to exclude emerging asset managers simply because they have a short history of business."
This is a very passionate statement for a principle of this kind.
Differences in roles from the Stewardship Code
What is an asset owner? This is a very broad term. There are public pensions such as GPIF, university funds, etc. And in the United States and other countries, the asset owners provide funds to emerging management companies are often "family office" type asset owners, because they are fit as both aspects in terms of size and type of assets. In Japan some asset owners, such as trust banks and life insurance companies, have signed the Stewardship Code, but many asset owners who are non-financial institutions (such as corporate pensions and university funds) have not had the opportunity to invloved in the Stewardship Code. When I read the proposed principles, I thought of the UK's Pension Regulation. Even in the UK, where the Stewardship Code originated, the Pension Regulation provides asset owners with separate guide such as the philosophy and structure of management, the importance of managing entrusted management institutions, and governance in the rule. This is one of the reason why the Stewardship Code works well.
Will the Asset Owner Principles change asset management in this country? What kind of opinions will be expressed in the public comment period that will soon begin?
However, can asset owners who comply with this principles choose independent (emerging) asset managers based on the principles? There are various factors in asset allocation. It is not enough to be just "independent/emerging", and it is necessary to thoroughly discuss what kind of management can utilise its strength of independence. In addition, as shown in the survey above, independent asset management companies currently have a small scale of management. Compared to other countries, the players of asset manager ratings or pension consulting to educate asset owners is still limited. In order to revitalize the asset management market in this country, all efforts will be necessary, rather than pinpointing specific issues. It is important that various stakeholders send their opinions on this public comment opportunity and make this discussion more lively.
