While the retail market's potential is undeniable, by no means should it be considered easy money, said Bill Wilder, president and chief investment officer of Nikko Asset Management Co. Ltd., Tokyo. "If you are not here right now, it would be difficult to gain a sizable share of the market," said Mr. Wilder.
The firms who will experience the most success in Japan's retail market boom will most likely be firms that have already have a significant presence in the country, said Mr. Wilder, also the former president of Fidelity Investments Japan.
Those firms will have the advantage in establishing relationships with Japan's banks and broker-dealers, which are responsible for the lion's share of mutual fund distribution. The Japan Post, which first began selling mutual funds last year, is also in the process of expanding the number of mutual funds it distributes, and it is viewed by many as a critical channel for fund managers in the long-term development of the fund industry.
A mix of roughly 50 foreign and domestic firms makes up the majority of the existing investment management industry in Japan.
Domestic firms such as Nomura, Nikko, Daiwa Asset Management Co. Ltd. and Kokusai Asset Management Co. Ltd. are viewed by many as the early market leaders. U.S. firms such as Fidelity, Merrill Lynch Investment Managers Co. Ltd., JPMorgan Asset Management Ltd. and Goldman Sachs Asset Management, all with a significant presence in Japan, also are held in similar regard.
As money managers fight for new business in Japan over the next several years, the keys to success will largely lie in performance, product development and distribution, according to fund executives, as well an understanding of Japanese investors' needs.
"Investors are willing to take on more risk, but they are also accustomed to receiving regular income off of their savings," said Keiichi Miki, president of JPMorgan Asset Management Japan, Tokyo. "It is an easier concept for new investors to accept and it is absolutely critical right now to offer funds that pay out regular dividends."
"The baby boomers need cash flow because they need something to provide for old age," said Hisashi Kamezawa, head of intermediary sales for Morgan Stanley Asset & Investment Trust Management Co. Ltd., Tokyo.
The demand for these types of funds has spanned across multiple asset classes, said Mr. Miki. He said balanced, global real estate investment trust and fixed-income funds are becoming more popular with mutual fund investors. Mr. Kamezawa added that over the past 12 months, he has seen a strong demand for foreign fixed-income strategies, including high yield and emerging market debt.
The majority of Japan's mutual fund assets are held in various types of fixed-income funds, with roughly 10% of the market — $50 billion — invested in one fund, Kokusai's Global Sovereign Fund, one of the largest bond funds in the world.
Japanese investors historically favor such investments because of their low-risk tolerance, said Fidelity's Mr. Nakajima. But with the Japanese stock market rallying over the last two years, more investors are beginning to show interest in equity funds. But "there are still a lot of people who are waiting see if the recovery is for real," added Mr. Nakajima. "It was only three years ago that the markets hit bottom."
Despite some skittishness, the next wave in mutual fund investing will likely be geared toward Japanese equities, said Goldman Sachs' Mr. Fitzgerald. If and when Japanese investors flock to Japanese equities, they will go to the names they know, and firms that have had the best performance. "This is why you really needed to build up a capability well in advance of demand," he said. "Your track record and your confidence must be developed for you to be successful."
Even existing major players continue to ramp up, including Nomura, which recently shifted into high gear to pursue growth in the mutual fund market, said Mr. Shibata.
"We have a strong engine and we must continue to make the engine even stronger," said Mr. Shibata. Nomura has hired more than 100 new employees over the last 18 months, including a number of portfolio managers. "We need the products to support investors, but we need to put our money where our mouth is," he said.