Tokyo-headquartered fund manager Nikko Asset Management, a firm with over 60 years of establishment experience in Asia, has set for itself a lofty target: to double its assets under management (AUM) in the decade to about US$500 billion ($706 billion) in 2032 from about US$243 billion as at March 31.
While Nikko can grow organically, it will not be able to reach the target of doubling the AUM with a return on equity of 9% without inorganic growth, says its president Stefanie Drews in an interview with The Edge Singapore.
Hence, the firm will look at a combination of organic and inorganic growth through six different areas, with the first three involving scaling up its distribution channels in Asia, the US and Continental Europe.
In EMEA (Europe, the Middle East and Africa), for instance, Nikko has been actively growing its footprint. It recently expanded its presence in Frankfurt, Luxembourg, London and Edinburgh. To strengthen its institutional sales effort in Europe, it recently appointed a new business development director, Marleen Barents-Jager, to look after Netherlands, Belgium, Luxembourg and the Nordics.
In Asia, Nikko is expanding its distribution through both new and existing partners. In Malaysia, for example, Nikko works with fund manager Affin Hwang Asset Management (AHAM), one of the country’s largest asset managers with total assets under administration of RM76 billion ($22 billion) as at May 31. PE firm CVC Capital recently bought a stake of 68% in AHAM while Nikko retains the second largest stake of 27%.
Drews describes AHAM as a “great partner” — one who can help Nikko understand Indonesia and Vietnam — on top of Malaysia. Nikko is also interested in Thailand, so it is looking at a partner that understands that market. “Our pursuit for inorganic growth spans the next three to four years, so we are not rushing into the first thing that’s there. We are looking for a good match that can collaborate with us — it is deeper than just a financial investment,” says Drews.
See also: Pictet filing mistakenly showed US$15 bil bet on Chinese bank
In China, Nikko is eyeing the establishment of a wholly foreign-owned enterprise in combination with Shenzhen-based Rongtong Fund Management Co, of which Nikko has owned 40% since 2007.
Strengthening investment capabilities
Aside from scaling its distribution channels, Nikko plans to achieve the AUM target by expanding its investment capabilities in three areas: real assets, exchange-traded funds (ETF) and environmental, social, and governance (ESG).
See also: S'pore's net AUM inflows falls to $193 bil in 2023, but AUM grows to $5.4 tril
Describing the current market environment as “unusual and complex”, Drews points out that the similarly volatile and bearish market after the Global Financial Crisis still had safe havens such as fixed income. Today, however, the correlation between fixed income and other assets such as equities has narrowed, leading to a market where “more patience” is required.
There is also a potential shift towards longer-term trends, says Drews, questioning whether the market is at the beginning of a commodity supercycle, which suggests that the firm needs to look at more real assets in the portfolio that are able to bring inflation-adjusted yields. To do this, Nikko is talking to a “number” of different parties, she adds. “Similarly, on the ETF front, we are also looking for a partner to wrap our active strategies and push them out to investors as ETF funds,” she says.
In the US, for instance, Nikko partnered with global asset management firm Krane Funds Advisers (KraneShares) — known for its China-focused ETFs — to launch KraneShares Asia Pacific High Yield Bond ETF last year. The ETF is benchmarked to the JP Morgan Asia Credit Index Non-Investment Grade Corporate Index, providing exposure to US dollar-denominated high-yield debt securities issued by companies in Asia excluding Japan. Nikko Asset Managers Americas is the sub-advisor of the active ETF.
Drews believes that the firm has done well in Singapore and Hong Kong, but wants to go out further into the US and EMEA. “Being realistic, however, the ETF business is very different from active management — we need both liquidity and scale. This is why we need to find the right partnerships and where we are looking to grow,” she says.
In Singapore, Nikko offers seven ETFs to investors, such as the popular Nikko AM Singapore STI ETF, which seeks to replicate the performance of the Straits Times Index. In Hong Kong, it offers the NikkoAM Metaverse Theme Active ETF that primarily invests in companies involved in activities relating to the metaverse. Its top three holdings as at September are Microsoft Corp, Sony Corp and Netease.
Singapore-based ESG efforts
On the ESG front, Nikko is striving to meet the “highest standard” globally, which Drews acknowledges is a very tough task. To be clear, the firm already has a strong ESG capability, having become signatories to both the Japan Stewardship Code and UK Stewardship Code 2021.
For more stories about where money flows, click here for Capital Section
The Japan Stewardship Code, or the “Principles for Responsible Institutional Investors” was established under the auspices of the country’s regulator Financial Services Agency in February 2014. The code is a guide for institutional investors to promote sustainable growth of investee companies and enhance the medium and long-term investment return for clients and beneficiaries.
Nikko takes a global approach to the code, focusing on the core components of stewardship. Its engagement with companies also takes into consideration their medium and long-term sustainability, including ESG factors in accordance with its investment management strategies.
Meanwhile, the UK Stewardship Code is the Financing Reporting Council’s (FRC) set of principles for those investing money on behalf of UK savers and pensioners. The stewardship previously had more signatories, before requiring applicants to show detailed evidence of how their actions complied. This resulted in the failure of one third of the applicants, according to 2021 data from FRC.
Moving forward, Nikko plans to drive its ESG efforts from Singapore. This is due to the city-state’s advantages in terms of time zone, the workforce’s linguistic capabilities, as well as the understanding of global ESG standards. “For example, the highest standard right now is Europe’s Sustainable Finance Disclosures Regulation (SFDR), which is the only legal ESG standard in the world,” says Drews. The SFDR refers to a set of rules aiming to make the sustainability of funds more comparable and better understood by end-investors, focusing on pre-defined metrics for assessing the ESG outcomes of the investment process.
Under the SFDR, funds can be grouped under Article 8 or 9, among other classifications. Article 8 refers to funds that promote environmental or social characteristics or a combination of those characteristics, provided that the companies they invest in follow good governance practices. Meanwhile, Article 9 refers to funds that have sustainable investment as its objective and an index has been designated as a reference benchmark.
“We can see that more funds in Singapore are looking at meeting the requirements for Articles 8 and 9. This capability allows us to ensure that our stewardship is globally consistent. And so, I think we are ‘unusual’, as a Japanese company building our ESG efforts out of Singapore aspiring to a global standard,” explains Drews.
She clarifies that Nikko already has a number of ESG strategies in place, but the firm is aiming to get all of its funds classified as Article 8. Currently, it only has one Article 9 strategy, which is its Nikko AM Global Green Bond Fund.
Given the focus on creating impact, Drews says the investable universe of sustainable companies can be quite small — this is why the firm is also including companies transitioning to becoming sustainable. “For example, on global equity, one of our biggest markers is something we call ‘future quality’, or businesses with a path to high and sustainable returns which are under-appreciated by the market.
“I think that this is a completely non-reversible trend even though there are bumps in the road, and I think it is really important that people carefully look at what they are investing in to make sure that at least the transitional story is in place,” says Drews.
‘Beacon’ for ESG
Drews stresses that Nikko is serious in its sustainability efforts, as it sees itself as a “beacon” on pushing the ESG agenda. This includes its internal efforts, as the firm undergoes a corporate sustainability journey which is “100% bottom-up”. For instance, an idea generation forum established several years ago had led to the formation of 11 sustainability, diversity and inclusion groups, as well as an eventual formalisation of the company’s global sustainability department.
This then started having an impact on operations, with sustainability incorporated into employees’ key performance indicators. Other changes include calculating and inputting one’s carbon footprint when applying for work travel requests, as well as changing work desktops to laptops to reduce energy consumption.
“We apply the highest standards for ourselves — for example, we want women to represent 30% of the firm globally, which is difficult as an asset management company. We nailed it in Singapore with over 40% representation, but there is a big vacuum outside of it,” Drews says.
Drews herself — a German national who grew up in Naples, Italy — is a representation of this diversity and inclusivity, being the firm’s first non-Japanese president. She was appointed to her current role in April to succeed Junichi Sayato, who previously held the three roles of chairman, president and CEO. Prior to assuming her current role, Drews had held key roles in international sales and strategy, sales support as well as product development since joining the firm in 2014. She had previously worked with firms such as Barclays and Morgan Stanley.
“I think it is really progressive for Nikko to have a nomination committee which is output-focused, giving me a chance to be considered even though I am not the typical candidate,” says Drews, referring to the lack of women in Japan’s leadership roles.
“There’s quite some ways to go in terms of women earning leadership positions, and I don’t think that it cannot be improved. It is just something that needs to be encouraged more — not just through top-down government incentives, but bottom-up as well,” she concludes.
