The long-term outlook for foreign firms getting involved in the newly-deregulated Japanese mutual fund industry appears to be bright, but progress will be slow, says a portfolio manager who handles investments in Japan for Credit Suisse Asset Management.
The main challenge for foreign firms is to introduce traditional Japanese investors to investment products they have not seen before, said Mark K. Silverstein, Credit Suisse Asset Management's head portfolio manager for global fixed-income products in Japan. Silverstein spoke at a lunch last week in New York sponsored by Credit Suisse Asset Management.
Credit Suisse has had a presence in Japan for over 25 years and recently, its Japanese business has grown to include 43 funds distributed by 23 Japanese banks, Silverstein said. The firm has a total of $15.6 billion in assets under management in Japan, including equity and fixed income assets managed for large pension plans and mutual funds distributed by broker/dealers.
Silverstein said there are three main areas in which the mutual fund marketplace in Japan is opening up. First, pension fund managers are departing from their traditional strategy of picking a fixed number of investments and sticking with them to one in which they are willing to make changes. Also, foreign managed funds can now be sold through more channels than previously. Finally, banks are now offering mutual funds and competing with broker/dealers, Silverstein said.
Overall, investors are tending to start out with money market funds or fixed-income funds and then branching into equity funds. About 70 percent of new money is going into money market funds, Silverstein said.
It will take a year or two before most Japanese investors turn to equity funds, he said. After money market funds, the most popular mutual funds for Japanese investors this year will be global bond funds and global balanced funds, partly because they are the easiest to understand.
Japanese institutions are offering their own money market funds and are asking foreign firms to develop equity and fixed-income funds. The primary distribution channels, including banks, are choosing the international funds they will offer based on who they deem to be the best managers.
The major challenge to overseas funds is investor education, Silverstein said. Japanese investors are unfamiliar with and need to be taught concepts like risk and return and how mutual funds hedge their assets to guard against currency fluctuations.
Different banks will take different approaches to introducing Japanese investors to mutual funds. Sumitomo Bank offers 25 funds, figuring that investors can understand those offerings.
On the other hand, Sumitomo Trust (no connection to Sumitomo Bank) is taking a more gradual approach, introducing a few funds at a time.
"The idea is not to overwhelm them right away, but slowly give them more choices over time," said Silverstein.