The following is a translated excerpt from Koji Sugita’s 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 fourth and the last part of the series.
Parts 1-3 addressed ongoing problems in Japan’s toshin business and how they might be addressed. Part 4 looks to the future and how toshin can adapt to serve contemporary realities.
5. Seek foreign investor cash
Although the search for foreign investor assets is focus worldwide, Japan is in particular need of investor capital from abroad. The growth of household financial assets in Japan has stalled due to slowing economic growth and the expectation of less dynamic growth in the future. From 2000 to 2017, household financial assets in Japan grew by 1.3 times, versus 1.7 times in Germany and 2.3 times in the US. Growth in Japanese household financial assets has been hampered by: 1) an unfavorable deposit-to-asset ratio allowing only modest gains in market prices for financial assets; and 2) diminishing cash flow (i.e., financial asset gains minus divestments) caused by economic slowdown and an aging population.
The JPY 1.8 quadrillion in financial assets held by households in Japan is not insignificant; however, even if the share of investment funds in household financial assets grew from the current 4% in Japan to 12%, as in the US, the investment fund assets held would increase by only JPY 144 trillion. The global total of investment fund AUM is JPY 5 quadrillion (USD 44.9 trillion at $1=112.65 yen). More should be done to direct a portion of that capital to toshin and Japanese fund managers.
Much of the recent growth in global investment fund AUM derives from developing countries. Growth rates are higher in China, India, Brazil, South Africa, etc. The combined AUM for investment funds in 18 developing countries accounted for 7.2% of the world total in 2017. While that may seem small, the combined investment fund AUM of those18 developing countries grew an astonishing 1,677% between 1999 and 2017. In the same period, the combined AUM of 29 developed countries grew only 266%. Given the outsize role of developing countries in investment fund growth worldwide, Japan would be wise to encourage development and implementation of the Asia Region Funds Passport.
Tapping foreign investor cash would enable Japanese asset management companies to increase AUM and lower their cost of operations, benefiting investors and themselves.
6. Re-start Money Market Funds (MMF)
Following the BOJ’s announcement of negative interest rates in January 2016, all Japanese MMFs were closed and redeemed by 2017. However, even in environments of low to negative interest rates, MMFs are useful, as demonstrated in the US and Europe.
Created in the early 1970’s and introduced in Japan in May 1992, MMFs injected some needed variety into investment fund products. Earlier products, such as stock funds and long-term bond funds, generally suffered under interest rate increases. MMFs, by contrast, generate good returns under interest rate increases. With all three products to choose from, investors worldwide have some protection against volatility. Furthermore, MMFs are a good place to start for first-time investors unaccustomed to risk.
MMFs also help temporarily redirect investor cash when stock markets become too volatile. When the IT Bubble burst in the early 2000s, bond funds and MMFs helped cover the losses in stock funds. During the financial crisis of 2008, stock funds lost 48% of their AUM from the previous year. MMFs absorbed a portion of those assets falls, so that the total loss of global investment fund AUM was 28% from the previous year.
While fund management and sales companies should continue to refine products and concentrate resources, Japan’s toshin industry should offer at least some volatility-resistant products. Whereas Money Reserve Funds can be distributed through securities houses, MMFs can be sold through various channels. MMFs are worth reviving to enrich toshin product lineups.
7. Reach beyond Japan
Strengthening and expanding asset management capability are persistent issues for fund managers. Japan’s toshin management companies have been cited for lagging global consolidation trends. Many Japanese companies outsource the management of overseas securities to foreign companies. European fund management companies, for example, make much investment in markets abroad since their domestic markets are small. On the other hand, US companies are less likely to seek work overseas, with the exception of some larger managers. Vanguard, the largest, oversees mainly index funds in foreign markets as well as the US, which serves its interest in cost-effectiveness.
For Japanese management companies, unless toshin AUM were to grow several times the current size, it makes sense to focus on passive investments or to outsource when dealing with foreign securities. Meanwhile, Japanese managers should focus on the Asian market, where future growth is most likely. Japanese firms could establish a boutique presence, for example, specializing in ASEAN countries and taking advantage of Japan’s geographic and time-zone proximity.
As we enter the era of 100-year lifespans, long-term asset building and effective asset management are increasingly important. Toshin can play a much larger role as fund products offer the flexibility needed to meet long-term needs. As Japanese society continues to gray, I hope to see many more investors embrace toshin to secure comfortable futures.