The following is a translated excerpt from Kohji Sugita’s comprehensive book, World of Toshi Shintaku (January 2019, Kinzai Institute for Financial Affairs, Inc.), about Japanese investment funds (toshi shintaku), commonly known as toshin.

IJ will reproduce Chapter 10 “Future of Toshi Shintaku”, Section 3 “Recognizing Problems with Toshin Sales and Corporate Value” in four parts. Following is the second of the four-part series.

1. Too many funds

As shown below, Japan is home to a greater number of investment funds relative to AUM than other advanced nations, and the average size of each fund is the smallest among the five nations compared.  These smaller funds can be more costly for investors.  The large number of small funds in Japan is partially due to the existence of unit-type funds, but it is more broadly explained by too many fund launches and too little fund consolidation.

Number and Assets of Publicly Offered Securities Funds
(at YE 2017, $1 = ¥112.65)

Based on data from The International Investment Funds Association (IIFA) and Investment Company Institute (ICI)

The launch rate of new funds (yearly new fund number divided by fund number of previous YE) in Japan is higher than in the US and Europe, as seen in the accompanying graph.  One possible explanation is Japanese sales practices, which incentivize offering new products.

Sources: Japan – The Investment Trusts Association, Japan             
US – ICI                              
Europe – Thomson Reuters “European Fund Industry Review 2017” and EFAMA

2. Inappropriate sales practices

The average holding periods for long-term investment funds (funds excluding MMF/MRF) are shown below.  After the Lehman Brothers bankruptcy in 2008, UK investors typically held onto investments at least 4 years and US investors remained held theirs at least 3 years.  In Japan, the average holding period began to fall in 2008 from 4.7 years to 1.7 years in 2013.  The trend reversed for a while, but dipped below 3 years again in 2017 when many investors decided to sell into the recovery.

Based on data from: The Investment Trusts Association, Japan
The Investment Association, UK

Moreover, many Japanese investors buy funds with no clear investment goal in mind, tending to sell on early signs of profit.  Almost 30% of individual investors in Japan say they buy toshin funds for no particular reason except “increasing assets”.

One key way to develop toshin sales channels is to promote the use of independent financial advisors (IFAs).  These professionals are not widely represented or appreciated in Japan and currently play only a minor role in toshin sales.  Before IFAs can perform a meaningful role in Japan, individual investors must become accustomed to paying for investment advice.

For years, toshin retailers have been criticized for prioritizing their own profits over customers, setting up new products and encouraging customers to transfer or repeatedly buy and sell products to generate commissions.  Below are my suggestions for addressing the issues raised above.

Improve corporate value

Toshin asset managers can improve the value of their investments by actively engaging with investee companies in accordance with the Stewardship Code.  Enhancing the value of corporations and their stocks will only strengthen the market for investment funds.  Sustainable sales of toshin will follow once long-term investors begin to see improving returns on their investments.  Upgrading and expanding NISA and iDeCo will also help foster the long-term accumulation of investments.

Replace sales commissions with asset-based fees

Converting to a fee-based business model, whereby retailers profit from the growth in investor holdings, would help reduce the impetus for short-term selling/buying to generate sales commissions.  Tying retailer revenue to the market value of customer assets means that both prosper in tandem.  It’s a win-win for investors and retailers.  Such a conversion would take time, though.  Even with a favorable investment environment, the U.S. required more than 30 years to substantially change retail practices, and some commission-based activity can still be found.  Moreover, Japanese are not yet accustomed to paying for financial planning advice.  Receiving fees from funds based on the asset balances seems less like a direct fee on customers and would be a practical interim step toward retail reform.

Monitor and evaluate retailers

Past solutions to the problems of toshin retail practices have been ineffective.  Adopting a slogan of “customers first” doesn’t actually change sales behavior.  It’s time to impose a new system that evaluates retail companies and their fund sales practices the way investment funds and their managers are evaluated around the world.

To that end, Rating and Investment Information, Inc. (R&I) started a service in late 2017 named “Customer-Oriented Investment Trust Sales Company Evaluation” to help investors choose a financial institution.  R&I offers independent evaluation of retail practices³ at financial institutions who apply.  More than 20 securities houses and banks have been evaluated so far.

In 2018, Japan’s Financial Services Agency published “common key performance indicators” (KPI) for monitoring the customer-oriented business conduct of investment trust distributors. The quality of self-evaluation by KPI varies from institution to institution and does little to help consumers choose a financial company.  FSA subsequently came up with 3 “common” indicators to simplify comparisons among financial institutions and help consumers visualize the balance of long-term returns versus risks and costs for the products which each financial institution sold: 1) per capita profit/loss from investment trusts and fund wraps; 2) cost vs. return for the top-20 investment trusts by AUM; 3) risk vs. return for the top-20 investment trusts by AUM.  As of June 2019, 281 financial institutions published their common KPIs.


³ R&I assigns five performance grades: SS – excellent; S – very good; A – Good; B – sufficient, needs some improvement; and C – insufficient.


< continued in Part 3: >