BOSTON -- Despite U.S. and European money managers' moves into Japan, foreign managers will lose market share there over the next five years, a new report predicts.
By 2005, non-Japanese managers will see their share of Japan's fund management market shrink to 14% from 16% now, according to the report by Cerulli Associates Inc., a Boston consultant.
This reverses a decade-long trend in which foreigners have steadily seized greater control of the fund management industry.
And as foreign money managers see their share of the market shrink, Cerulli predicts Japan's investible assets will grow to Y295 trillion ($2.8 trillion) from Y205 trillion now.
"There will be growth there," said Ben Phillips, a consultant with Cerulli. "It's just that foreign fund managers have assumed this is a wide-open prairie where they can drive a stake into the ground and stake a claim."
But that's clearly changing, he said. "Japanese managers are putting up a fight."
The report, "Trends in the Japanese Asset Management Marketplace," was based on interviews with asset management executives, regulators, data vendors and industry experts in Japan, as well as on Cerulli's own research.
Its conclusions apply to foreign firms with separate subsidiaries as well as the spate of joint ventures between Japanese and non-Japanese firms.
Japanese firms are likely to turn the tables on their foreign competitors, the report concludes.
U.S. and European managers have been touting changes in Japan's fund management industry -- particularly the likely advent of defined contribution plans and the distribution of mutual funds through banks -- as big opportunities.
But as much as 75% of the initial defined contribution money is likely to flow to capital-protected investments such as bank deposits and insurance products.
Pending legislation that appeals to the conservative nature of Japanese investors would require contributors' principal to defined contribution plans be protected. Foreign managers, who tout performance, will find this part of the market tough to crack, he said.
And recent reforms in Japan's financial marketplace are creating stronger domestic financial service companies. These firms are going to rely to a greater degree on asset management revenues, the report states. For example, the recently created alliance of Industrial Bank of Japan Ltd., Dai-Ichi Kangyo bank and Fuji Bank Ltd., and Sumitomo Corp.'s group of companies each will represent 17% of the marketplace by 2005, the report said. Each group alone will manage more than foreign managers will in aggregate. Western money managers routinely point to their joint ventures with Japanese firms as a sign that they will be able to gain market share in Japan. Not so fast, according to Cerulli. Almost two-thirds of all cross-border fund management joint ventures in Japan founded between 1979 and 1995 failed. And Cerulli predicts most of those created in the past two years will founder by 2002. Those still standing will most likely be ineffective, the report predicts.
Joint ventures have had a tough time making a dent in the market. They saw their share of managed assets grow to 2.8% from 2.7% in the 12 months ended March 31, the report states. And most of that gain was by one group, Barclays Nikko Global Investors. The Japanese appear to be learning from their competitors. They are hiring investment professionals from London- and New York-based money managers, as well as looking to hire Japanese with experience overseas, Mr. Phillips said. Japanese fund managers are looking to buy overseas firms. Japanese money managers are taking advantage of existing keiretsu, or corporate group connections, he said. Many companies still prefer to do business with their current vendors.