ENTERING THE JAPANESE ASSET MANAGEMENT INDUSTRY --
What to be aware of: licenses, investment vehicles, local partnering, management fees, other players (e.g., trust banks, life insurance, consultants, etc.)

Part 3. How to enter the market?

Q.	What is 'toshin'?
A.	Toshin fund is one of the major destinations for most Japanese investors. Toshin is an abbreviation for 'toshi-shintaku', literally, investment trust. Under the Act on Investment Trusts and Investment Corporations, toshin is an investment vehicle similar to the mutual fund and closed-end fund in the US. In Japan, the word 'fund' has become a synonym for 'toshin'. If you are thinking of selling US or other foreign funds in Japan, you should make some accommodations to Japanese investor demands. For example, Japanese investors, such as pension funds, invariably prefer funds that carry a relatively low expected return and risk. Currently, funds with a 3-5% expected rate of return outsell those with a 10% expected rate of return and higher risk. Japanese investors have suffered currency losses due to the sharp rise in JPY value against USD, almost eliminating their investment gains. As a result, Japanese investors may require some measures for hedging against currency loss.

What is 'toshin'?

Toshin fund is one of the major destinations for most Japanese investors. Toshin is an abbreviation for 'toshi-shintaku', literally, investment trust. Under the Act on Investment Trusts and Investment Corporations, toshin is an investment vehicle similar to the mutual fund and closed-end fund in the US. In Japan, the word 'fund' has become a synonym for 'toshin'.

If you are thinking of selling US or other foreign funds in Japan, you should make some accommodations to Japanese investor demands. For example, Japanese investors, such as pension funds, invariably prefer funds that carry a relatively low expected return and risk. Currently, funds with a 3-5% expected rate of return outsell those with a 10% expected rate of return and higher risk.

Japanese investors have suffered currency losses due to the sharp rise in JPY value against USD, almost eliminating their investment gains. As a result, Japanese investors may require some measures for hedging against currency loss.

Q.	How do foreign asset managers enter the Japanese market?
A.	There are several ways. Major international players from the US and Europe who have established Japanese companies can obtain the necessary licensing under the Financial Instruments and Exchange Act ('kin-show-ho'). However, there are many foreign asset managers who successfully market their products in Japan without a Japanese license. These companies have formed strategic partnerships with major domestic players, positioning themselves as sub-advisers. The traditional practice of giving priority to 'keiretsu' corporate groups has waned somewhat, but the value of long-term relationships remains strong. There are advantages to partnering with major domestic players. If you intend to act as a sub-adviser, qualifying as an investment adviser may be useful. Last, but not least, clear explanations in Japanese language is crucial to approaching and maintaining Japanese clients.

How do foreign asset managers enter the Japanese market?

There are several ways.

Major international players from the US and Europe who have established Japanese companies can obtain the necessary licensing under the Financial Instruments and Exchange Act ('kin-show-ho').

However, there are many foreign asset managers who successfully market their products in Japan without a Japanese license. These companies have formed strategic partnerships with major domestic players, positioning themselves as sub-advisers. The traditional practice of giving priority to 'keiretsu' corporate groups has waned somewhat, but the value of long-term relationships remains strong. There are advantages to partnering with major domestic players. If you intend to act as a sub-adviser, qualifying as an investment adviser may be useful.

Last, but not least, clear explanations in Japanese language is crucial to approaching and maintaining Japanese clients.

Q.	What licenses are required to operate an asset management business in Japan?
A.	Under the Financial Instruments and Exchange Act, there are four categories of financial instrument business: Type I Financial Instruments Business Type II Financial Instruments Business Investment Management Business Investment Advisory Business A Financial Instruments Business is basically a broker-dealer business. Type I includes the marketing of shares, bonds etc., and Type II includes the marketing of certain fund interests. Investment Management Business covers asset management. This license is necessary when managing funds under a discretionary trading contract. Licenses can be acquired by submitting the official application forms to the Local Finance Bureaus which serves as a branch office for the Financial Services Agency. Asset management companies registered as Financial Instrument Business Operators are charged with providing loyalty, prudent management, and fiduciary responsibility to customers.

What licenses are required to operate an asset management business in Japan?

Under the Financial Instruments and Exchange Act, there are four categories of financial instrument business:

Type I Financial Instruments Business
Type II Financial Instruments Business
Investment Management Business
Investment Advisory Business

A Financial Instruments Business is basically a broker-dealer business. Type I includes the marketing of shares, bonds etc., and Type II includes the marketing of certain fund interests. Investment Management Business covers asset management. This license is necessary when managing funds under a discretionary trading contract.

Licenses can be acquired by submitting the official application forms to the Local Finance Bureaus which serves as a branch office for the Financial Services Agency.

Asset management companies registered as Financial Instrument Business Operators are charged with providing loyalty, prudent management, and fiduciary responsibility to customers.

Q.	Is it true that asset managers in Japan earn less in fund management fees than their foreign counterparts?
A.	Many Japanese asset managers would probably say yes. In the past, competition among domestic asset managers was fierce. Many tried to gain a larger share of major markets such as pension fund, by cutting prices, including their own management fees. Lately, however, things have changed. Domestic institutional investors, including pension funds, now offer more diversified portfolios, requiring a better variety of assets and strategies. Price competition is less intense and asset managers with a good track record can negotiate for higher fees.

Is it true that asset managers in Japan earn less in fund management fees than their foreign counterparts?

Many Japanese asset managers would probably say yes. In the past, competition among domestic asset managers was fierce. Many tried to gain a larger share of major markets such as pension fund, by cutting prices, including their own management fees.

Lately, however, things have changed. Domestic institutional investors, including pension funds, now offer more diversified portfolios, requiring a better variety of assets and strategies. Price competition is less intense and asset managers with a good track record can negotiate for higher fees.

Q.	Is it true that shintaku ginkos (trust banks) have a lock on marketing funds to pension funds in Japan?
A.	Shintaku ginkos have a long-standing and unique relationship with corporate pension funds. By law, pension funds must deposit the money they manage in shintaku ginko accounts. Until 1997, when the restriction was eased, pension money was managed only by shintaku ginkos and life insurance companies. Even now, shintaku ginkos have significant influence over pension funds, acting as the main consultant in portfolio management. Still, various avenues are open to foreign asset managers seeking to do business with pension funds. Many asset managers, both domestic or foreign, are reaching out to pension funds directly.

Is it true that shintaku ginkos (trust banks) have a lock on marketing funds to pension funds in Japan?

Shintaku ginkos have a long-standing and unique relationship with corporate pension funds. By law, pension funds must deposit the money they manage in shintaku ginko accounts. Until 1997, when the restriction was eased, pension money was managed only by shintaku ginkos and life insurance companies. Even now, shintaku ginkos have significant influence over pension funds, acting as the main consultant in portfolio management.

Still, various avenues are open to foreign asset managers seeking to do business with pension funds. Many asset managers, both domestic or foreign, are reaching out to pension funds directly.

Q.	What strategic partners are beneficial to foreign asset managers?
A.	You should find a good fund distributors. Companies registered as Type II Financial Instrument Business Operators can sell funds on their own. Many asset managers and investment advisers without Type I registration have Type I operator allies instead. The three Mega Bank groups have their own broker-dealers, asset management companies and shintaku ginkos. Every distributor specializes in certain kinds of funds and customers. A broad survey of asset management business in Japan is recommended.

What strategic partners are beneficial to foreign asset managers?

You should find a good fund distributors. Companies registered as Type II Financial Instrument Business Operators can sell funds on their own.

Many asset managers and investment advisers without Type I registration have Type I operator allies instead. The three Mega Bank groups have their own broker-dealers, asset management companies and shintaku ginkos.

Every distributor specializes in certain kinds of funds and customers. A broad survey of asset management business in Japan is recommended.

< Ben Wada >