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Japanese Broker Pairs With FOLIOfn on New SMAs


If you think it's challenging to convince your clients to open a separately managed account, imagine the work Yoshishige Saigusa, CEO of Nikko Cordial Advisors, a unit of Japan's third-largest brokerage, has cut out for him.

Nikko Cordial is introducing Japan's first separately managed account product in a market where most investors keep their money stashed in passbook savings accounts and the stock market has been notoriously disappointing over the past decade. Thus, Nikko Cordial is offering SMAs with a minimum $100,000 with $20,000 per sub-account. That could be a big draw, since stocks trade exclusively in large lots in Japan -- typically 1,000 share blocks at an average price of $10 a share -- which limits access to the market and the ability to diversify, Saigusa said.

With technology supplied by FOLIOfn to build its separately managed account platform, Nikko Cordial may have found a way around that particular problem. FOLIOfn offers a system that allows users to buy and sell baskets of individual securities of any size. "That's why we needed FOLIOfn," Saigusa said, "not only to control the portfolio but also the trading mechanism to trade one share or two shares."

Steven Wallman, CEO of FOLIOfn, said the joint venture with Nikko was extremely challenging. Not only did FOLIOfn workers have to work with a partner 10,000 miles away, but they had to make the system compatible with Nikko Cordial's own legacy system, which required detaching the front-end functionality from FOLIOfn's brokerage and recordkeeping systems.

FOLIOfn's programmers had to adapt their software to suit the Japanese market in other ways, as well. Nikko Cordial wanted the ability to use the platform to short stocks, an important feature for investors scarred or scared by many years of bad news. FOLIOfn also had to make adjustments that would adapt the software to Japan's less-liquid markets, because the market actually closes for lunch and reopens in the afternoon.

One difficulty FOLIOfn did not face in getting its joint venture off the ground was opposition from reluctant regulators. Wallman, a former commissioner at the Securities and Exchange Commission, said that the Japanese financial regulators were actually very supportive.

Nikko Cordial's timing may not be as bad as it sounds. Japan is in the process of undergoing a deregulation of its banking sector comparable to the repeal of the Glass-Steagall Act in the 1990s, which should lead to more competition, Saigusa said. Even some convenience stores now sell securities, he noted. At the same time, the government is encouraging the development of 401(k)-style accounts, and investors are becoming more optimistic about the markets. There are also indications that people are spending their money more freely.

But challenges remain. "I'm afraid in Japan, brokers' reputations are not as good as in your country. Not only brokers' reputations but also the stock market's reputation," Saigusa said, noting that most Japanese investors still view stocks "as a sort of gambling market." In addition, mutual funds are also less popular in Japan than in the United States. The most popular are offered by banks and invest primarily in fixed-income products. But Saigusa is betting that investor frustration with the ultra-low interest rates of their passbook savings accounts, the transparency of the product, and the transition to a less-regulated marketplace over the next few years should help Nikko Cordial attract clients to its SMAs.

The initial offerings are primarily market-neutral, long-short accounts. Nikko Cordial will then add other portfolios in the fall to increase diversification, such as portfolios of American stocks. "What we've heard from clients is very positive, but now they have a wait-and-see attitude in general," Saigusa said.

But they may not wait as long as some might expect. One Japanese business expert said that financial conservatism is a less deeply ingrained trait than Westerners generally assume. Richard Katz, editor of The Oriental Economist, a New York-based newsletter on Japan, said Japanese investors' current penchant for risk-aversion is not a longstanding cultural phenomenon but "a very recent development." Until the 1960s, Katz said, the majority of Japanese households owned stocks. Then, the government began discouraging individuals from owning stocks "as an anti-takeover device. It partly occurred when they were liberalizing foreign direct investments so they wanted to make companies takeover-proof, having seen Americans buy so much in Europe," he said.

Of course, some of the lack of enthusiasm is undoubtedly also a rational response to the market's endless gyrations over the past decade. "It's doubled and halved several times in the past few years. You could make tons of money if you're a great market timer. But if you're an ordinary person, you could really get hurt very badly unless you really know what you're doing," Katz said.

In a few months, Saigusa anticipates that Nikko Cordial will begin to see one of its competitors introduce SMAs. But he doesn't seem concerned, perhaps because he estimates that in 10 years, Japan's managed money industry could be worth north of $200 billion.

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