Over the next five years, Japanese money managers will reverse the momentum that foreign fund managers have established in that country, according to a report by Cerulli Associates of Boston.

That is bad news for U.S. mutual fund companies hoping to take advantage of the investment management deregulation and expansion currently underway in Japan.

The share of business that foreign investment firms has claimed for themselves, or in partnership with domestic firms, is expected to decline from 16 percent to 14 percent by 2005, reversing a decade-long expansion, according to Cerulli.

Foreign fund managers' stake today in Japan's money management business is about $310 billion of a $1.92 trillion market, Cerulli said. Cerulli estimates that the Japanese fund market, second only to that of the U.S., will rise to $2.76 trillion by 2003, which means that any slip-ups by foreign companies could lead to billions of dollars in lost potential revenue in the next five years alone.

Consolidation among Japanese firms, including the merger of the Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank, all of Tokyo, is expected to give domestic money management in Japan an additional edge, according to Cerulli. By 2005, the merged entity of those three banks and the Sumitomo family of financial services companies of Osaka are each expected to establish a 17 percent share of the asset management market in Japan, according to the Cerulli report.

U.S. companies working alone represent a large proportion of the foreign competition in Japan. Goldman Sachs of New York, Fidelity Investments of Boston and Alliance Capital of New York are the top three foreign companies in the retail fund management market, according to Ben Phillips, a consultant at Cerulli. U.S. companies have a seven percent stake in the Japanese asset management market overall.

U.S. players are not as dominant in institutional money management. Merrill Lynch of New York is the fourth largest foreign institutional manager in terms of assets under management while Goldman is the seventh and Putnam Investments of Boston is the tenth, according to Phillips.

However, many Japanese fund managers will be bought by foreign firms at significant discounts compared to what U.S. fund managers command on the market, Cerulli said. Many Japanese financial services companies will sell their fund management units because of competitive pressures created by the Big Bang deregulation.

Japanese institutional fund managers should be valued at about 0.6 percent of assets under management, Cerulli said. Cerulli is advising prospective buyers to not pay more than one percent of assets under management for any Japanese fund manager, even though in the U.S., fund managers are valued at anywhere from two percent to five percent of assets under management.

Cerulli predicts that many Japanese fund managers will be bought in the year 2000 because of discount.

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