It May be only three months since Belgo-Dutch group Fortis Investments acquired the Japanese equities division of German-owned asset manager WestAM. But the operation has already been formalised as one of the Fortis “Investment Centres,” under Kazuhito Yoshihara, who came as part of the deal, together with equity professionals, sales and support staff.
Tokyo, boasting a top quartile four-year track record in Japanese equities, has been added to the existing manufacturing centres in Boston, Brussels, Paris, London, Luxembourg, Shanghai and Utrecht, the Netherlands.
Asian diversification seems a good idea as Fortis’s flagship European equity product has underperformed the MSCI Europe index over one, three and five years, according to S&P figures.
While Japan lagged behind other markets by 15 per cent during the last 10 years, Fortis believes shareholders will force structural changes needed to close this gap for good.
The key example is Nissan, the world’s best performing automotive stock since being bought by Renault in 1999. Shares rose 44 per cent last year, following Renault boss Carlos Ghosn’s three-year revival plan.
But Mr Yoshihara believes Japanese stocks remain cheap, according to historic “price-to-book” ratios.
Mr Yoshihara reports to William De Vijlder, chief investment officer at Fortis, responsible for managing E78bn in assets, with direct control over all the investment centres. Mr De Vijlder underlines the pragmatism of Fortis CEO Richard Wohanka, who was formerly the chief of WestAM.
“There is always an advantage to working with old friends,” said Mr de Vijlder. “This way, there are no surprises. Our clients wanted local Japanese expertise, and the added bonus is the sales operation. It will also be very interesting for us to sell Japanese and non-Japanese products to Japanese clients.”
The deal added e80m to Fortis’s Japanese equity mandates, bringing the total under management in Tokyo to e400m, all now transferred to the new, improved process.
The resurgent Japanese market was seen by Mr De Vijlder and Mr Wohanka as the missing piece in the network of analysts covering Europe and the US. “Now we have a top-notch, dedicated Japanese product, and the necessary research for the management of our global equity product in Boston,” said Mr De Vijlder. The Tokyo team’s sector specialists visited 1700 companies last year.
The belief is that Japan is of interest to investors confronted with an uncertain future, following cyclical rallies in major bourses after a three-year bear market.
Fortis is predicting a low expected return environment for the next five to 10 years in the core markets.
That’s why previously peripheral Asian markets are now central to its plans. An Asian equities fund for domestic Chinese investors raised e1.3bn in March, well ahead of the e200m target. Now that Fortis has secured the required licences in China, it hopes to raise another e200m from foreign institutions.
“This means there’s a necessity to broaden the asset mix to capture risk premia in those asset classes where they still exist,” said Mr De Vijlder. He also calls for improved housekeeping to make sure portfolios are allocated in the most efficient manner.
“If a portfolio is slightly inefficient, this is not a problem when you are getting 20 per cent returns. But in the current climate of 8 per cent returns, exploring diversification is far more important.”
He is recommending clients sign up to either a “portable alpha” concept, or to a “market timing” strategy, or to a combination of both.
Crucially, the in-vogue portable alpha strategy has the buy-in of consultants selecting managers for deficit-burdened pension schemes. It allows a risk budget to be transported from money market or indexed assets to the outer reaches of a portfolio invested in high yield bonds, emerging market debt or hedge funds. Alternatively, investments can be timed to allocate between equities, bonds and cash.
“But if we have four or five years of positive equity returns, people will look at absolute return products and see only half of the market return,” said Mr de Vijlder. This is why he advocates a combined strategy, giving the asset manager a greater discretion over investment parameters. This new way of thinking has more than a passing resemblance to the balanced strategy ditched by many clients during and after the last bear market, conceded Mr de Vijlder.
“If you agree that this is the shape of things to come, then as an asset manager, there are a number of things one can do to extend the product offering,” he said. Buying the Japanese investment centre, is one way of expanding this in-house expertise. “An externally managed fund sounds less convincing if you don’t have that asset in-house,” said Mr de Viljder.
“If you take the road of developing investment expertise in-house, you need a solid financial base.” This is something that Fortis Investments can clearly boast. Net operating profits rose 7 per cent last year, despite acquisition costs and a scarcity of new assets from elsewhere.
“What has changed is that after the original move from fixed income to equity-based products, we are in a new world where classical long-only funds are in demand, but augmented by absolute return products. We expect that the new environment causes re-visiting solid balanced management, where the asset manager has the leeway to diversify the portfolio with a lot of discretion.
“We need a solution which is more challenging for the asset manager, but more in line with what the client wants, in an environment of low expected returns.”
Major overhaul creates regional investment centres
The Fortis reorganisation has already shown some success. Fitch ratings has recognised the investment centre concept and awarded “AA” asset manager ratings to all of the original centres, bar Boston’s US fixed income capacity.
The Japanese acquisition did not surprise watchers of Richard Wohanka, quietly spoken but steel-willed chief executive officer of Fortis Investments.
Mr Wohanka swooped for six heads of key product lines soon after joining Fortis at the end of 2001. Jacques Joakimides, head of the increasingly fashionable European convertibles asset class came from Mr Wohanka’s previous home of WestAM. Under Mr Wohanka’s stewardships, WestAM added E30bn in assets through acquiring three firms.
Wohanka: ex WestAM
But Mr Wohanka played down any notion of aggressive acquisitions at Fortis to an expectant workforce. He found a well-run if slightly unfocussed company when he joined. He quickly sorted this into a system of regional investment centres, each with particular product specialities, concentrating on manufacturing products for the Fortis bank and insurance company. At the same time, he identified Germany, Austria, Italy, Spain and the UK for growth, moving away from servicing clients purely in the Fortis homelands of Belgium and Holland.
Mr Wohanka had already acquired E4bn of assets, with 21 staff when Fortis bought BGL Asset Management at the beginning of 2003. And there was an apparent group ban on new acquisitions, amid talk that asset management would never be profitable enough to become the “third leg” of Fortis.
But the problem was that many existing clients now wanted to buy Japanese equities, and Fortis did not have a good enough capability internally.
