Morgan Stanley steers yield-hungry Japan clients towards alternatives

Morgan Stanley’s Japanese asset management arm plans to expand its 3.1 trillion yen ($29 billion) portfolio by tapping yield-starved investors’ growing interest in unconventional assets abroad.

The firm will attract money from Japanese institutional investors by touting so-called alternative assets, including loans extended by funds to small U.S. and European companies, Morgan Stanley Investment Management (Japan) President Hiroyuki Shimizu said in an interview.

Rock-bottom interest rates have driven Japan’s biggest banks and insurers into overseas alternatives, such as real estate and private equity, even though they can be harder to unwind than traditional assets like government bonds. The trend has been spreading to smaller Japanese investors in recent years, partly because the cost to hedge foreign investments against the yen’s fluctuations has added pressure to find high-yielding assets, Shimizu said.

“The investor base appears to be growing,” he said. “Regional banks and smaller life insurers are increasingly signaling a willingness to consider alternatives, and the same can be said about pension funds.’’

Alternatives account for less than 5% of the assets overseen by Morgan Stanley Investment Management (Japan), a figure Shimizu said will likely rise in the future. In addition to corporate loans, the firm’s lineup includes U.S. and Asian private equity and real estate funds, as well as assets associated with foreign infrastructure, he said.

Globally, Morgan Stanley Investment Management oversaw $321 billion in assets as of March 31, excluding those parked in short-term investments such as money-market funds, according to its website. The shift into alternatives should help the Japan unit increase its share of the total to more than 10% in two to three years from around 9% recently, Shimizu said.

For a yen-funded investor, the annualized cost to currency-hedge a U.S. dollar asset is around 2.8%, according to data compiled by Bloomberg. This means investors would lose money by buying U.S. 10-year Treasury bonds with a such a hedge, given that current yields are lower than the hedge cost, at around 2.1%.

Bloomberg