Starting this month, both domestic and global asset management companies in Japan will launch a wave of investment trusts, or mutual funds, investing in Japanese equities aimed at Japan's retail market.
The latest Japanese equity investment trust offering comes from Daiwa Asset Management Co., which was to be introduced Feb. 10. Marketed as an aggressive growth investment trust, its target size is 300 billion (US$2.8 billion) but will likely exceed that figure since it is an open-end fund, said sources in Tokyo. Others preparing to launch Japanese equity investment trusts over the next few weeks include foreign firms GE Capital Japan, JP Morgan and ING Barings, of Tokyo, as well as the domestic firms of Nikko Asset Management Co. and Nomura Asset Management Co., both of Tokyo.
Asset management companies are no doubt hoping to repeat the success of Nomura's "Big Project-N" strategic fund introduced earlier this month. The fund raised over 800 billion ($7.3 billion) in the offering period alone, making it the biggest investment trust in Japan to date. Roughly 630 billion ($5.8 billion), or 80 percent, came from retail investors, with individual purchases averaging 5.12 million (US$47,032) - about 150 percent more than comparable figures for other equity funds marketed by Nomura, according to Nomura.
Previously, the biggest fund in Japan was Fidelity's Japan Open, which had 472 billion (US$4.3 billion) of assets under management at the beginning of this month.
What made Nomura's introduction of its new product so impressive was the degree of individual investor appetite it showed in Japan, where investors have traditionally placed their money in low-yielding bank deposits and the postal savings system.
"It wasn't so much the amount of money they raised, since their target is 1 trillion (US$ 914 billion)," said Yashwant Bajaj, head of Japanese equity sales at Lehman Brothers Japan of Tokoyo. "It was the speed at which they got it which surprised the market. The net affect is that it shows investment trust management is an extremely lucrative business in Japan, so you would expect major information technology managers to come out with significantly larger equity funds."
The number of investment trusts in Japan has been growing steadily ever since the "Big Bang" financial deregulation program in 1998 lifted a number of restrictions from the investment trust sector. But the sharp rise of new funds now stems from many other factors.
Last year's strong performance of the Tokyo Stock Exchange is the most obvious one.
"Public interest in investment trusts is much greater now than a few years ago because the Japanese equity market has gone up so much in yen and dollar terms," said Clifford Shaw, president of Merrill Lynch Mercury Asset Management in Tokyo. Japan's extremely low interest rates are another factor, since they have made yields on many safer investments almost negligible, he said.
Also, until recently, Japan's investment trust industry was preoccupied with 401(k)-type pension schemes, whose introduction in Japan has been pushed back to January 2001. That delay has caused fund managers to shift their attention away from pension to investment trust products. Furthermore, since January is when most workers receive their year-end bonuses and Japan's overall economy remains sluggish, now is a good time to establish new funds, said Bajaj.
But, perhaps the most influential factor is the huge amount of private savings in the Japanese postal system scheduled to mature over the next two years. Roughly 80 trillion (US$734.9 billion) of 10-year postal savings deposits will come up for potential redemption, representing a potential boon for the funds industry, said Shaw.
"Obviously, people in our industry are eager to get our hands on that," said Shaw. "Much of that money will probably go back into postal savings deposits with shorter maturity, since no one wants to lock it in for 10 years at current rates."
As a result, Japan's funds industry is set to become more competitive, with new and old players jockeying to get a piece of the growing market.
"Five years ago, only twenty-odd companies were authorized to produce investment trusts," said Shaw. "Now there are about 60 players, including domestic and foreign, and a lot more new product ideas. It's a very competitive market."
One trend likely to develop is the creation of more strategic ties between domestic and international firms in asset management. For example, JP Morgan & Co. of Tokyo has teamed up with Dai-Ichi Kangyo Bank, also of Tokyo, to form DKB Morgan, whose main business is fund aggregation and marketing.
"People are looking for joint venture partners and thinking about strategic alliances," said one equity strategist at a U.S. firm in Tokyo. "Foreign houses have an edge in terms of product but not in distribution. Asset management is set for a huge expansion in Japan, and everyone is thinking of how to tap into this."