On Friday, the Japanese asset management firm AIJ Investment Advisors Co.’s stopped its business operations after losing “most of” its YEN 183 billion ($2.3 billion) in managed pension assets. The warning signs of the destruction came as early as 2009.

According to The Wall Street Journal, a 2009 client newsletter by the Japanese credit rater, Rating & Investment Information Inc., cautioned that AIJ had “unnaturally stable returns” even with the down market. The firm hadn’t been identified in the newsletter but based on its description, most pension-industry experts identified it as the questionable firm, according to Hidekazu Nagamori,  managing director for the newsletter.

In the previous year before the ominous warning, AIJ with its 12-person staff, had received the No. 1 ranking for Japanese pension funds in a R&I customer-satisfaction survey. AIJ had been know to brag about its routinely high returns.

Nagamori said to The Wall Street Journal that his company became uneasy with AIJ when it heard pension fund clients talking about the firm’s 10-year record of higher-than-average returns, regardless of market conditions. Nagamori added that he alerted financial regulators about this.

From 2009 to 2011, AIJ said its three investment funds saw annual returns from 5 percent to 10 percent, as reflected in numerous  pension-fund reports reviewed by R&I. Nagamori said that very few Japanese investment managers had seen three consecutive years of positive returns.

Nagamori said, “People in the industry had wondered about the company—they’d always thought something was shady. We felt the need to sound the alarm.”

The Financial Services Agency, the regulator overseeing Japan’s securities and exchange, did not comment whether it knew about AJI’s three-year-old concerns. An official did say the agency was limited in reviewing investment managers after the number of firms  increased from 2007 registration changes.

Serving as AIJ’s spokesman, attorney Sei Takahashi, said the company isn’t “in a position to provide a detailed explanation” since they are under regulatory investigation. He added, “We are cooperating with the authorities.”

The Details

Details are still sparse but this case could potentially one the biggest ones of missing funds for Japan in history. FSA did say that on Friday it appeared that AIJ lost “most of” the 183 billion yen ($2.3 billion) in the corporate pension assets under management as of Dec. 31, 2010.

Compared to $17.3 billion lost by investors with the Bernard Madoff Ponzi Scheme, this is small but there are similarities with the consistent reporting of returns regardless of the market’s direction. AIJ has said in a filing to the Japan Securities Investment Advisers Association, that its investment strategy focused on shorting Nikkei 225 options and arbitrage trades in equity and bond derivatives.

AIJ details are mysterious but it’s been around since 1989 and it allegedly sold asset-management services primarily to pension funds for small and mid-sized Japanese companies. According to a filing with Japan’s Pension Fund Association, the firm had 127 investment-management contracts at 218 billion yen total through the September 2011; the majority was for Japanese corporate pension funds. The filing also included one unnamed foreign company had 18.5 billion yen in assets with AIJ.

Some industry experts said pension funds investors came to AIJ from troubled sectors including transportation, construction or plumbing, anxiously looking for high returns.

Kazuhiko Asakawa, a former broker, is the head of the firm and has worked in management and investment consulting and computer consulting.

Image via: The Globe and Mail