Despite the hype, this month's liberalizations of rules governing the management of Japan's pension market will benefit relatively few non-Japanese money managers in the short term.
Accords further opening Japan's securities industry came immediately before the visit to the U.S. by Japan's Prime Minister Tomiichi Murayama.
Among the agreements, the biggest coup was the opening of Japan's public pension market to investment advisers, both foreign and domestic. In the pension area, negotiators also announced some further opening of part of Japan's corporate pension fund market.
But the sums initially bandied about - including $200 billion of public fund assets - are much greater than the amount non-Japanese managers actually have a shot at managing.
According to InterSec Research Corp., new Japanese pension money being made available in 1995 will run about $50 billion, "compared with the total $400 billion that the popular press has been talking about," said David Booher, director of InterSec's London and Tokyo office. In 1996, he calculates another $40 billion to $50 billion of new pension money will be up for grabs.
Realistically, investment advisers can only hope to win some of the new money coming into Japanese pension funds. As experts point out, in relationship-oriented Japan, it's highly unlikely existing managers - such as trust banks and insurers - would be dumped and their accounts given to investment advisers.
Furthermore, foreign investment advisers are expected to face stiff competition from Japanese-based firms, such as Nomura Securities Co. Ltd. or Daiwa Securities Co. Ltd. In part, that's because of the traditional affinity for large, well-known firms. "Only foreign managers that already have a relatively significant presence in this country have the opportunity to get public fund money to manage," said Noriyuki Morimoto, a consultant with The Wyatt Co. in Tokyo. Those would include Jardine Fleming, DB Morgan Grenfell and Schroder Investment Management.
Given the cost of establishing an office in Japan, many foreign managers aren't likely to contend for Japanese pension assets. Those that do set up in Japan face the fact that it could take years to land clients - and that patience is a necessity.
According to Carol Proffer, managing director of William M. Mercer Asset Planning Inc., Dallas, some investment managers have closed down their Japanese operations "because of the time it takes to cultivate clients, and a number of other firms that have been there a long time haven't gotten as many Japanese clients as they'd have liked."
Indeed, Aeltus Investment Management Inc., Hartford, Conn., still has no Japanese pension money under management even though the firm has had a representative office in Japan since the 1980s. "It's hard going. We're no different from other managers who have made efforts (in Japan) with little results," said Orlando Lobo, Aeltus' vice president for international sales and marketing. "The new regulations will be a helpful step in the right direction, but they're a long way from being what you or I would consider open markets."
An official of Schroder Investment Management in London, who asked not to be named, said he was pleased with the newly announced liberalizations in Japan's securities industry. He considers them to be part of Japan's on-going liberalization in the pension area.
But Schroder, which he said now has $750 million under management from Japanese clients, doesn't see a huge opportunity in Japan. "The potential for foreign managers in the Japanese pension business will be fantastically small for the foreseeable future. It's very rare for foreigners to have a large share of any domestic pension fund business" outside of their home country, he said. But, of course, "we can make a profit on the assets we manage there," said the Schroder official, who called his firm "one of a half-dozen foreign managers" with a serious presence in Japan.
The key liberalizations regarding Japanese pension management are:
Technically, the estimated $200 billion Pension Welfare Service Public Corp., or "Nenpuku"- essentially, the equivalent of social security funds - will be accessible to investment advisory firms; previously, only trust banks and life insurers in Japan could manage this money.
The age of corporate Employee Pension Funds (as distinct from Tax Qualified Pension Funds) that can use investment advisers is being reduced to three years from the previous eight. Now, investment advisers can manage only up to one-third of the assets of these pension funds. But over time, that one-third limitation should be relaxed.
Investment advisers managing Nenpuku and employee pension fund assets no longer are subject to a minimum allocation to fixed-income securities.
However, pension funds overall still will have to meet the 5-3-3-2 investment regulation. By that rule, funds need a minimum of 50% of assets in safe, principle-guaranteed assets (i.e., government bonds), while the fund can have no more than 30% in equities, 30% abroad and 20% in real estate.
Money managers will have access to the mutual aid associations (funds of public employees) of the Federation of National Public Services and Affiliated Personnel, with $70 billion in assets, and that of Nippon Telegraph, with $20 billion in assets, according to InterSec Research.
By 1997, pension funds should be using market values instead of book values for actuarial calculations.
Disclosure of fund manager performance on a market value basis will be encouraged.
Investment advisers will be allowed to use the same operation and staff in Japan for offering investment advisory and investment trust (mutual fund) management. This is expected to lower the cost of doing business in Japan.
Other accords reached between the U.S. and Japan included easing rules governing the creation of new financial instruments and scrapping or reducing limits on various cross-border transactions.
"I believe we got liberalizations in all three categories: investment trusts/pension fund management; corporate securities issuances; and cross-border transactions," said David Strongin, international finance director of the Securities Industry Association in New York. "That's not to say we got everything. But I believe the agreement is a significant step forward in financial services trade with Japan."
But for most observers, the payoff, if it comes at all, will be down the road. So far, the Japanese pension market has been wedded to balanced management and its affinity for "safe" investing.
While foreign managers might have an edge in the area of performance and in offering specialty products, it remains unclear how quickly Japanese pension sponsors will embrace these newer ideas. "It's premature to say that these changes, as announced, will automatically lead to much more in the way of specialty appointments. There are too many other factors at work," said InterSec's Mr. Booher. In the United Kingdom, for example, although some firms have been marketing specialty products for 10 years, pension funds still predominantly use balanced management, he said.