TYPES OF JAPANESE INVESTORS --
What kind of investors exist in Japan?
What makes each class special?
Which asset classes are gaining popularity in Japan?
What are the current trends influencing Japanese investors?
What challenges do investors face?
Part 2. Who are Japanese investors?
Who are the Japanese investors? Which types of investments do they prefer?
Major investing groups and their characters are as follows.
Public-sector pension funds
Asset management results of Government Pension Investment Fund (GPIF) are reported on its website (https://www.gpif.go.jp).
GPIF has invested some portion of their money in alternative assets, such as real estate and infrastructure, through designated gatekeepers.
GPIF's process of selecting asset management (AM) companies and funds are publicly disclosed.
Corporate pension funds
Japan's two major corporate pension fund systems are the DB (defined benefit) plan and the DC (defined contribution)plan. There are 13,174 DB funds as of August, 2018.
Investment decisions are made by the treasury department at each company (Kiyaku-gata a.k.a. contract-type) or by the CIO of each fund (Kikin-gata a.k.a. fund-type). Domestic trust banks have exercised great influence over the investment decisions of DB funds.
About 30,000 companies in Japan own corporate DC funds as of February, 2018. DC fund holdings are selected from limited class of assets offered by registered AM companies.
Mega Banks (The three major financial groups)
Three financial groups — Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho — own various financial companies.
Their commercial bank division, called a Mega Bank, is the core company in each financial group.
Mega Banks have their own AM teams for large-scale proprietary trading. Their affiliate asset management companies provide various funds for other investors.
Trust banks (Shintaku ginko)
By definition, shintaku ginkos should essentially specialize only in providing trust and custody service, but some shintaku ginkos also operate as AM companies in certain fields, including pension management.
Shintaku-ginkos have historically provided various funds to corporate pension funds, private placement funds (e.g., passive funds of stocks or bonds), and multi-asset funds called "balance fund".
For foreign AM companies seeking to enter the Japanese market, shintaku ginkos might be competitors or potential partners, depending on circumstance. Either a shintaku ginko or the asset manager of the same Maga Bank group may manage various funds for pension funds that include stocks, bonds, and multi-assets, while a shintaku ginko acts as gatekeeper or distributor for pension funds in alternative assets, such as hedge funds and private equity.
There are 104 regional banks or chiho ginkos in Japan, not including smaller scale community-based banks known as "shinyo kinko" and "shinyo kumiai".
Demand for outsourcing portions of their asset management has been increasing among most chiho ginkos and shinyo kinkos. Most of these regional banks have a history of purchasing funds, e.g. foreign bonds fund, through major domestic broker-dealers.
Life and general insurance companies act as major asset managers not only for themselves but also for institutional investors such as pension funds.
The portfolios of a few major insurance companies are highly diversified and include various alternative assets.
Individual investors, mostly high-income class, used to prefer short-term buying and selling of individual stocks, due to marketing strategies by domestic broker-dealers.
Recently, Japan's financial authority has advised broker-dealers against recommending short-term buying and selling.
Major domestic broker-dealers are guiding customers toward longer-term investing with the introduction of wrap account services and assistance in building portfolios. The financial authority introduced tax-cut plans such as NISA (Nippon Individual Saving Account) for individual investors.
The Japanese financial community assumes individual investment assets to be approximately JPY 1,700 trillion, most of which is held in bank deposits. While the future for individual investor business may be bright,growth so far has been slow.
Do Japanese investors have any specific concerns? Are there any new trends in the market?
Yes, the main current issues and trends are:
Hedging against loss caused by currency fluctuations
As investment in foreign assets increases, Japanese investors are constantly think about how to hedge against currency losses. In 2017 and 2018, hedging costs in US dollar-based assets remained relatively high.
Consequently, Japanese investors in US Treasury bonds are experiencing a difficult time.
The extremely low interest rate of JGBs (Japanese Government Bonds) have led to so-called yield hunting among Japanese investors.Foreign bonds and private assets, such as real estate and infrastructure, are increasingly receiving serious consideration by pension funds and other institutional investors.
Encouraged by financial authority policy, Japanese asset managers operate with increased awareness of their fiduciary. Asset managers of all types,including pension funds, are increasingly sensitive to accountability in investment decisions.
ESG (environmental, social and governance)
A popular topic of conversations and seminars.
Institutional investors seek more effective investment than merely tracking market indices. Especially with regard to stocks,they have chosen funds tracking a "smart beta" index, which picks up factors other than the beta of plain market index.
Minimum volatility and high dividend yield indices are especially popular with Japanese investors.
Minimum volatility is preferred by investors who dislike high volatility, while a high dividend yield index is preferred by yield hunters.
< Ben Wada >
Guide to Japanese Asset Management Market for Foreign Managers (Part 3): https://investmentjapan.jp/japansbasic/1142/