(Bloomberg) -- Acadian Asset Management, the Boston-based quant fund that says it shares its investment secrets with clients, has set up in Japan as the nation starts to embrace smart beta strategies.
The $70 billion Acadian has opened an office in Tokyo and got a license toward the end of last year to help Japanese investors build equity portfolios, executive vice president Ross A. Dowd said. By explaining to clients why its models buy and sell stocks, the fund can stand apart from peers that tend to obscure their investment methods with secrecy or complexity, according to Dowd. Acadian aims to triple assets managed for Japanese customers to $4 billion in five years, he said.
Acadian’s move follows last year’s decision by the Government Pension Investment Fund, the world’s largest manager of retirement savings with $1.1 trillion in assets, to allocate money to broad, data-driven investing. Acadian says this small shift away from passive strategies and human stock-picking will accelerate as other public and private funds follow suit.
“When people hear quants, they think black boxes, but we’re very transparent,” Dowd said in an interview in Tokyo on Jan. 14. Quantitative investing is “becoming more adopted in the market place” in Japan, he said. Changes taking place at public pensions “help us in terms of offering strategies that fit with that type of shift in asset allocation.”
Acadian dates back to 1977, and in 1992 became a subsidiary of the U.S. asset-management arm of Old Mutual, a 170-year-old investment and insurance group that oversees $456 billion. Dowd said Acadian’s models cover more than 40,000 global securities, and look at four broad variables when deciding to buy or sell a stock: corporate governance, valuation, earnings growth and momentum. Transparency with customers has helped in hard times, he said.
Clients were less uncomfortable during the financial crisis “because we’d given them enough forewarning that we wouldn’t do well in certain environments,” Dowd said. “But they had comfort that they were going to be protected and they’ve benefited on the way out.”
Assets increased 46 % as of the end of last year from $48 billion in 2008, according to Acadian.
The fund sees opportunities in small and middle-cap stocks in Japan, Dowd said. Its preferred sectors are consumer discretionary and large exporters and manufacturers, whose earnings prospects are boosted by a weaker yen. The Tokyo Stock Exchange Mothers Index of smaller companies lost 1.2 % today, while the benchmark Topix index slid 0.9 %.
The U.S. “is beginning to get expensive, so we may take down our exposure over time, and you might see us shift into the Japanese market on a relative-value basis,” Dowd said. “A lot of small, mid-caps in Japan offer a lot of value.”
Smart beta occupies a middle ground between active and passive investment that builds its own indexes or tweaks existing ones. The goal is to boost returns by ranking companies not by market value, but by measures such as volatility and dividend payments.
The approach tends to be more expensive than passive investment because it incurs more transaction costs. Market-cap weighted passive strategies replace 13.5 % of their portfolios on average annually, according to research last year by Vanguard Group, the largest U.S. mutual fund manager. Dowd said Acadian’s annual turnover ratio is about 70-80 %.
Exchange-traded funds tracking non-market capitalization strategies had about $55 billion in inflows globally over the last year, bringing their assets to about $264 billion, according to data compiled by Bloomberg.
GPIF started investing in smart beta in March, hiring managers including Dimensional Fund Advisors, after other pension funds including CalPERS put money in the approach. GPIF had about $10 billion in the strategies at the end of March, the fund’s most recent data show. Three other public pensions and smaller retirement pools managing about $501 billion as of March 31 are set to align their investment approach with GPIF on Oct. 15.
Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co., sounded a note of caution about smart beta.
“I don’t see it lasting,” Seshimo, whose company oversees about $857 million, said in a phone interview in Tokyo on Jan. 15. “If smart beta keeps expanding, it’ll create opportunities for other investors to take advantage,” he said. Generally speaking, “the more transparent smart-beta strategies are, the more problems they cause for themselves, so it can’t be more than a niche category.”
For Acadian, which decided to set up in Japan before GPIF’s move, the shift couldn’t have come at a better time, Dowd said.
“An increasing number of pension funds are looking at what the GPIF is doing,” he said. “And there’s heightened interest in smart beta in general.”