Western money managers increasingly are striking deals with Japanese entities to offer mutual funds.
All are in hot pursuit of the trillions of dollars Japanese investors are said to have locked up in low-return savings vehicles. All eyes also are on close to $100 billion in lump-sum distributions understood to be leaving retirement plans annually, and the probable introduction of defined contribution plans by 2001.
"Anyone and everyone who purports to be a global manager" wants a presence in Japan, said Mark Adorian, managing director of Standard & Poor's Micropal, London. "All the big boys are getting into that market."
Last year, at least 12 major foreign money managers as diverse as Chase Manhattan Corp., PaineWebber Group Inc., First Union Corp., J.P. Morgan & Co. Inc. and MFS Investment Management announced either their interest in finding a Japanese partner or the establishment of a mutual fund business in Japan.
Others -- such as Putnam Investments -- which have been managing money directly for Japanese pension funds or as subadvisers for Japanese-owned mutual funds, also have introduced proprietary families of mutual funds.
Following hard on their heels was Morningstar Inc., Chicago. Morningstar introduced a Japanese version of its monthly newsletter, Fund Investor, in October and established a Web page for Japanese mutual fund investors at www.morningstar.co.jap. Morningstar now offers American-style analysis of about 1,500 mutual funds locally registered in Japan.
Another major American performance tracker, Lipper Inc., New York, may enter the market in connection with its parent, Reuters Holdings PLC, said Tom Butcher, director of international development.
But some observers don't expect significant movement into mutual funds -- after all, about three-quarters of the country's personal wealth is held by people over 55, and they remain stubbornly risk averse.
"The Japanese mutual fund market is still not an El Dorado for fund companies going over there," said Ben Phillips, a consultant at Cerulli Associates Inc., Boston. Cerulli will publish its first report on the Japanese mutual fund market in the second quarter, then will make it a regular feature of its consulting work.
Past domestic market meltdowns, shady and aggressive sales tactics by Japanese brokerage firms, and the low risk tolerance of Japanese investors have led to a shrinkage of the mutual fund market in Japan, down to about $362 billion as of Nov. 30 from more than $450 billion in 1990.
The number of mutual fund shareholders has dropped to about 300,000 or about 4% of Japanese households, from 2.5 million shareholders at the end of 1989, Mr. Phillips said.
Those investors who do own mutual funds favor bond funds. And even stock investment trusts tend not to be true equity funds in the Western sense: as of March 31, only 53% of assets invested in stock funds were invested in equities, Mr. Phillips noted. Overall, about 12% of the total $361 billion invested in Japanese registered mutual funds as of Nov. 30 was invested in stocks.
"These things all add up to make it difficult for mutual fund companies. There is a need to create a widespread comfort level for investors through education," said Mr. Phillips.
WAITING 20 YEARS
Reaching that comfort level with equity investment may take Japanese investors at least as long as it took U.S. investors -- 20 years, said Avi Nachmany, a consultant at Strategic Insight Inc., New York.
"I think there's a strong likelihood of significant disappointment early in the process, if, as one hopes, the economy improves, the yen strengthens and interest rates rise. And Americans didn't have such a cultural fear as there is in Japan of the loss of capital," said Mr. Nachmany.
Even the advent of defined contribution plans might not prove to be the key to asset generation foreign managers hope it will be. "There's no guarantee (the DC plans) will use mutual funds or that participants will be given investment direction over their assets," said Lipper's Mr. Butcher.
Other market watchers are more confident foreign mutual fund managers eventually will make headway in Japan.
As Mr. Phillips noted, foreign managers have increased their market share in Japan to more than 10%, up from an estimated 3% of mutual fund assets as recently as April 1997.
And, Mr. Adorian of Standard & Poor's Micropal said the Japanese are becoming a nation of older people, terrified of outliving their savings. With bank deposit accounts returning less than 1%, "the real issue is that with only a small fraction of Japanese households owning funds, that has to increase. Locals are used to poor performance and shoddy sales practices, and by comparison the foreign managers are going to look much, much better than anything else available," said Mr. Adorian.
Managers coming to Japan bring demonstrable long-term track records and better marketing and packaging of funds, and can deliver what the Japanese most want -- some kind of yield, Mr. Adorian added.
Now that Japanese banks and insurers can distribute mutual funds and further financial liberalization is on the horizon, many managers have the right to be optimistic, although cautious, said Steven Spiegel, Putnam's senior managing director of international corporate development. "Anyone involved in Japan since Big Bang has to be optimistic about the future of investing by the Japanese."
PUTNAM, NIPPON LINK
Putnam, for example, has been involved in Japan since 1972, and manages $5 billion from Japanese investors in mutual fund assets in offshore and subadvisory relationships. Through a joint venture with Nippon Life Insurance Co. and its subsidiary, Nissay Asset Management Corp., both based in Tokyo, Putnam officials hope to dramatically increase the company's presence in the mutual fund market. Putnam has introduced three mutual funds for Japanese consumers and will flesh out the family of funds to span the full risk spectrum. One of the new funds attracted $400 million in its initial offering period in the fourth quarter last year and since has topped $450 million.
Putnam, like other foreign managers, is considering further partnerships, perhaps with other insurers and banks, Mr. Spiegel said, primarily to increase distribution.
But consultants warn that such relationships between foreign and Japanese entities might not last.
"At Cerulli, we are pessimistic about these partnerships. Many seem to be thrown together pell-mell. Even retail investors can see that these relationships are very loose, not even a true subadvisory relationship," said Mr. Phillips. "These are more marriages of convenience than anything else. The Japanese see these partnerships as temporary until they can build up their own global asset management businesses."
Mr. Adorian of Standard & Poor's Micropal agreed, and predicted the Japanese financial services companies will follow the same pattern Japanese car manufacturers did -- learn everything about the business from an experienced partner and then leave to imitate and perfect best practices.
"The Japanese are brilliant imitators. They get into bed with these foreign partners, as they did with cars, motorbikes and TVs, and go off and do the same on their own. I've no doubt they will do this with foreign money management," said Mr. Adorian.