Declining Markets Aren’t DeterringSuMi Trust’s Expansion Into the U.S. — They May Even Help

David Semaya is targeting $30 billion in investments, even though the states are “notoriously challenging for Japanese managers to do business in.”

David Semaya (Courtesy photo)

David Semaya

(Courtesy photo)

With the U.S. having outperformed international markets for years, allocators have started to turn their attention outside of the country. Rising domestic interest rates and inflation also are making the case for international investing stronger.

David Semaya, executive chairman at Sumitomo Mitsui Trust Asset Management, says the firm is ready for them.

The $719 billion asset manager has been quietly expanding into the U.S. The firm opened its New York office in 2020 — just in time for the Covid-19 pandemic. But as business travel has normalized, the asset manager is looking to accelerate its push into the Americas.

And in April, Sumitomo Mitsui Trust’s asset management division poached David Baeckelandt from Cambridge Associates to lead its U.S. client relations team stateside.

He acknowledges that the expansion will face some entrenched practices, including allocators not always tapping into the local expertise of managers on the ground in international markets.

“The U.S. market is notoriously challenging for Japanese managers to do business in,” Semaya said in an interview at the firm’s New York office in mid-May. “It’s sophisticated and large but very domestic. Asset owners often access international investments through exchange-traded funds, rather than local managers.”

But Semaya hopes the promise of more direct access will lure in new investors. The firm already has a large presence in Europe. But Semaya is hoping to bring in another $30 billion in U.S. investments across its active and passive equity strategies.

The asset manager sees an opportunity in the decline in global markets.

“It’s a good time to invest as the U.S. market retreats,” Semaya said. “Japanese large-cap companies will be as affected by the China slowdown as any global firms would be. But valuations in Japan never got as high as they did here in the United States.”

Smaller Japanese companies also are attractive to investors, he said. They have little to no debt on their balance sheets and still have projected revenue growth.

A large portion of the companies listed on the Tokyo Stock Exchange are micro- or small-cap stocks, which rarely garner coverage from analysts outside of Japan. Semaya touted Sumitomo Mitsui Trust’s coverage of these smaller companies as an advantage for investors who want access to the region.

But Japanese markets haven’t been spared from global economic concerns. The Japanese Yen hit a 20-year-low compared to the U.S. dollar last week. But Semaya, who spoke with Institutional Investor last month, explained that the currency’s falling valuation is not the Bank of Japan’s sole focus.

“There’s a debate going on about the speed at which the Yen is coming off,” he said of the Bank of Japan. “They can live with the Yen weakening... The aging population is keeping inflation lower. In certain areas, companies have great pricing power. In others not so much.”

Japan’s own market is shifting in other ways too. According to Semaya, there is an “interesting emergence” of a startup ecosystem. This is a break with the post-war tradition of lifetime employment in the country, Semaya noted, in which workers join one company and stay there through their careers.

Now more entrepreneurs are starting their own companies, leading to a surge in initial public offerings in the country — 138 total in 2021, according to consulting firm Deloitte.

Japanese companies are also reducing their participation in cross-shareholding, the practice of buying and holding shares in their peer companies, which was previously viewed as keeping markets stable. Sumitomo Mitsui Trust counts itself among those participating in the “mass reduction,” of cross-shareholding, Semaya said.

Sumitomo Mitsui Trust has also started dipping a toe into the private investment market. The firm has invested in MPower Partners Fund, a woman-owned Japanese venture fund seeking to integrate environmental, social, and governance factors into its investment process.

This investment is part of the firm’s broader focus on sustainability and ESG investing. An early Japanese signatory to the UN PRI, the firm has grown its stewardship team to 17 staffers. In 2021, Sumitomo Mitsui Trust listed a carbon-efficient ETF in the Japanese markets. The firm has also been increasing its engagement via corporate proxy voting both in Japan and outside of the country.