Catching the rising tide
The old adage that a rising tide lifts all boats applies exceptionally well to the fleet of asset managers navigating the Japanese market. Of course, the bigger the boat, the greater the float, so supertankers like Nomura Securities – which markets more than 200 investment trusts – are benefiting to an astounding degree from the rebound in Japanese equity prices and renewed interest in investment trusts from retail investors.
Japanese shares as measured by the Topix universe of some 1,350 stocks surged by 58.44% in 1999, closing the year at 1,722. And though the index now hovers at the mid-1,600 range, many market watchers believe another upswing will follow the recent correction in technology share prices.
The prospect of further upside has all fund managers – Japanese and non-Japanese alike – salivating madly, especially as retail investors start to unwind multi-year term deposits of more than ¥100trn (e1,010bn) from the postal savings system. The conventional wisdom says that up to 35% of that amount could pour into private investments, as individuals seek returns exceeding the sub-50 basis point level now offered by the postal savings system and banks.
At the end of 1999 there were approximately 3,600 bond and equity investment trusts in Japan, down from almost 6,400 in total in 1995. The number of equity funds has decreased from about 4,300 to about 2,750, while bond funds have dropped from about 2,100 to around 880.
The net assets of equity and bond funds combined in Japan in 1995 totalled approximately ¥35trn, and this amount has held up well considering the market turmoil from 1995–99. At the end of 1999, net assets in equity and bond funds totalled around ¥31trn.
However between 1995 and 1999, the number of asset management companies with membership in the Investment Trusts Association, Japan – the de facto industry trade group – increased from 53 to more than 85, with the number of Japanese asset managers growing by 10 to 50 and non-Japanese firms expanding from 13 to 37. What do all these figures point to?
First, a raucous shake-out in the number of funds conceived during the glory days of the bubble economy. Second, despite the shake-out, a steady amount of money has remained in the market and has flowed into a smaller number of arguably better products. Third, the influx of non-Japanese asset managers has led to heightened competition and spawned more creativity in product development.
In the marketing arena certainly the Japanese have learned a thing or two from mammoths like Fidelity, one of the most successful foreign firms in the market. Nomura launched what it calls the Big Project-N in January, and by March had achieved the distinction of being the first investment trust in Japan to top ¥1trn. It displaced as leader, by the way, Fidelity’s Japan Open product.
Nomura’s boat got a nice upward float from Big Project-N. With a commission of 3% on each sale, Japan’s largest brokerage has pulled in at least ¥30bn from this product. Nevertheless, the fund might find some tougher times ahead. The fund’s prospectus calls for investing 10% of its assets in small-cap stocks, though the ballooning size of the fund might make it hard to locate good investments in the illiquid small-cap universe.
The performance of investment trusts has blossomed recently in line with the upturn in Japanese shares overall, which have remained remarkably resilient in spite of havoc wreaked by prime minister Obuchi’s disabling stroke, the economy’s backslide into a technical recession, and the rupture of a volcano in northern Japan.
In one-year performance, the leader in 1999 was Jardine Fleming’s OTC Equity Open fund, which rocketed some 410%, far outdistancing second-place Invesco’s OTC/Growth fund, which garnered a 295% climb. Among the top 10 performers, JF, Nomura and Shin-Wako tied at three funds apiece, with Invesco contributing one.
In three-year performance in 1999, Nomura’s Aurora US small-cap fund took top honours with a return of 233%. The rest of the top 10 ranged from 226% to 202%, highlighting the growing competition in the market and the increasing quality of products. In the three-year category, JF stood alone at the top, boasting four of the top 10 funds, while Nomura came in second place with three. Dai-Ichi Kangyo Asset Management, Shin-Wako and Kokusai each had one apiece among the top performers.
Though many signs seem to be pointing upward for the investment trust market, one vexing problem remains: the conservatism of individual investors. Over 50% of personal assets are in deposit products, almost 19% in insurance, and over 11% in pension funds. Individuals’ investment in securities stands at just over 9%, while purchases of investment trusts account for a paltry 2%, versus 15% in the US.
But the rapid greying of Japan’s society and the inability of the national pension scheme to keep pace are spurring individuals to reconsider the way they prepare for old age. The Japanese government’s recently announced initiative to create a US-style 401k personal pension system is also an important step in freeing up a mother lode of assets stuck in underperforming conventional pension plans.
Finally, the financial planning industry in Japan is enjoying a boom, and almost all financial institutions offer some sort of financial advisory services. In this environment, more competitively priced investment trusts, such as passively managed exchange-traded funds and other innovative financial products, should prosper.
Both Japanese and non-Japanese asset managers are keenly surveying the changing currents, betting the rising tide will have enough power to lift an entire flotilla of supertankers.
David Collins is vice president, index services Asia-Pacific, at Standard & Poor’s in Tokyo