If foreign firms want to penetrate Japan’s fund management industry, their best bet is through defined benefit and sub-advisory channels, according to a report issued today by Cerulli Associates.

But future growth in Japan is not likely to come easily to foreign firms. Cerulli predicts that non-Japanese firms will represent only 14% of Japan’s fund management industry by 2005.

And while foreign and joint venture asset managers increased their share of the Japanese market from 16.1% to 17.5% in 2001, that success was isolated among 15 firms. Moreover, those select firms grew their share by no more than 0.1% while other foreign players either retained an equal share or lost ground, according to the report.

But by entering the Japanese market through sub-advisory and defined benefit channels, firms can reduce their entry costs, thereby improving their margins, according to the report.

Currently, there is approximately $6.7 billion in sub-advised assets in Japanese onshore investment trusts, with 35% of those assets concentrated in the international equity area, according to the report.

A growing number of foreign firms appear to be using sub-advisory and defined benefit channels to gain access to the Japanese market. In fact, no major joint ventures were established with Japanese distributors in 2001, "for the first year in recent memory," according to the report.

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