Fund Market in Japan Said to be Opening
July 31, 2000
The business climate for foreign mutual fund companies in Japan has recently been improving, executives said at a US-Japan fund management conference earlier this month in Tokyo.
Japanese investment management firms are increasingly willing to form partnerships with foreign firms, the government has eased investment restrictions and filing requirements, and the Japanese public is warming to the idea of equity investing, the executives said.
Until recently, mutual fund distribution channels in Japan were virtually closed to foreign firms, the executives said. Now, in the interest of improving their investment products, the same companies that would not consider working with a foreign company are willing to form partnerships with them, Japanese fund executives said.
The National Investment Company Service Association of Wellesley Hills, Mass. and the Kinzai Institute for Financial Affairs of Tokyo, a financial services industry trade organization, sponsored the meeting, the first annual Japan-US asset management forum, in Tokyo on July 12 and 13.
Any U.S. fund company shying away from Japan should consider that of the 76 investment management companies in Japan, 35 have foreign affiliates, said Thomas Romeo, a partner in the Tokyo office of PricewaterhouseCoopers of New York, who spoke at the conference. NICSA released highlights of his and other speaker's remarks following the conference. The conference was closed to the media.
Japan is a logical market for American companies to pursue since it is the second-largest economy in the world, has a rapidly-aging population and household financial assets of $12 trillion, said Romeo.
The Japanese are beginning to realize that these assets, most of which are in postal savings accounts, are getting low returns and they are beginning to warm to the idea of equity investing, Romeo said.
"A growing awareness of investment and retirement needs [is prompting] investors [to gain] knowledge, experience and confidence," said Takeshi Kasai, vice president and head of insurance planning and marketing at Fidelity Investments Japan Ltd.
Distribution channels are also expanding, Romeo said.
Until recently, the sole distributors of mutual funds in Japan were brokers, said Takahiro Fujino, chairman of Alliance Capital Asset Management Japan Ltd. of Tokyo. In December 1998, the government began allowing banks and insurance companies to sell mutual funds and they now sell 7.2 percent of all mutual funds, Fujino said. Another 3.8 percent are sold directly, he said.
The direct, bank and insurance channels are likely to grow and now is a good time for a fund company to get into one of them, Fujino said.
To ally with a Japanese intermediary, a company should establish a long-term relationship and commit to a sizable marketing campaign, Fujino said. A U.S. fund company should also consider providing sub-advisory or private-label investment management to Japanese companies, he said.
Japanese securities regulators are making it easier for investment firms to file funds, Romeo said. Regulators have also expanded the investment capabilities of mutual funds in Japan, he said.
The Japanese government in April abolished a number of long-standing restrictions on funds, he said. The most important of these was a restriction preventing a fund from having more than 50 percent of its assets invested in securities, Romeo said. A restriction on concentrated investments in one security has also been relaxed, he said.
A restriction on investments in beneficiary certificates of other investment funds was also abolished. As a result, offshore feeder funds are now allowed, Romeo said. A 10 percent limit on illiquid investments was also raised to 15 percent, Romeo said.
A prohibition against the issuance of warrants, subscription rights and options was also abolished, he said. Portfolio managers welcome this move because it widens their investment options.
The government's "Big Bang reforms have been significant," said Brian Golob, a representative director with Frank Russell Investments Japan Ltd. of Tokyo. But, he said more relaxed regulations are needed.
"We'd like to see more involvement by the industry in developing and adopting regulations, as well as more published guidance on disclosure and risk management issues," Golob said. For example, his firm would like to see the development of separate classes on Japanese mutual funds so that firms can market through a variety of channels, Golob said.