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 first of the 4-part series, led with excerpts from the book’s foreword and afterword.
“Life insurance is a plan for imminent death; toshin is preparation for a long life.” That observation from Toshi Shintaku in an Era of Economic Growth (published by Nomura Securities Research Department) was made in 1961. Nearly 60 years later, I quoted this observation in March 2018 for an article in a business journal. An influential figure in asset management responded: “Unfortunately, toshin haven’t lived up to expectations, have they?” In truth, Japanese investors have not embraced or had great success with long-term investments and toshin are not used to prepare for longevity.
I like toshi shintaku. I like the logical co-investment structure of diversified investments managed by professionals. So do US baby boomers, who buy mutual funds and other investment funds. But no one would go for a poorly managed investment fund, no matter how well-structured. Investment funds generally are not popular in Japan and the experience of many with toshi shintaku has been unsatisfactory, particularly with regard to sales and customer care. “I lost money.” “The commissions are high.” “After I bought a toshin fund, the retailer just forgot about me.” In the US, where mutual funds are popular and are considered a basic tool to build retirement assets, 43 households in 100 participate in mutual funds, amounting to an average of USD 68,000 in fund assets per capita.
What accounts for the difference between the US and Japan? The divergence began in the 1990s. In the mid-1980s, the percentage of households holding investment funds was nearly the same in both countries, 10% - 20%. That changed in the 1990s when stock performance in the two countries began to diverge. A stock index valued at 100 in the US in early 1990, would have risen to 758 by the end of 2017; the same index in Japan would have fallen to 63. During that period, US investors enjoyed a successful investment experience while their Japanese counterparts endured repeated failures. There’s a significant difference between 758 and 63.
For a long while, US stock values rose and bonds maintained decent returns. Simple funds held over the long-term performed well. As investors grew more comfortable with funds, fee-based sales became easier and assets under management (AUM) of funds increased steadily. In Japan, on the other hand, the stock market lost value and bond yields were ultra-low for years. Toshin retailers sold complicated products comprised of foreign securities that were later damaged by a strong yen. Investors came to distrust toshin and sold their stakes in the short-term for little profit, thereby halting the growth in toshin AUM. Toshin retailers could no longer expect steady revenue from sales and began to lean instead on commissions and transaction fees. Some retailers generated income by recommending short-term transfers to new toshin products to clients. As a result, investors no longer trusted toshin and new investment trailed what little AUM growth there was.
Simply put, Japan’s investment climate was awful. I would say it was the worst period in the history of investment funds in any country, in terms of damage and duration. You can see the results in the accompanying table. The AUM of investment funds per capita in Japan is one-ninth that in the US and one-fourth that in the UK and France.
Investment Fund Penetration in Major Countries (as of 2017)
*Germany’s figure appears low because many funds held are located outside of Germany, e.g. Luxembourg. Financial assets of individual Germans include 10% investment funds; whereas financial assets of the typical Japanese comprise only 4% investment funds.
< Sources: The Investment Trusts Association, Japan (JITA) / The International Investment Funds Association (IIFA) / IMF / Japan Securities Dealers Association (JSDA) / Investment Company Institute (ICI) >
Things began to improve for Japan in 2012. The Japanese government and Bank of Japan began making headway against deflation. Japanese stock prices rose by 2.5 times and AUM in toshin grew by 1.9 times between early 2012 and the end of 2017. Efforts to promote investing have been amped up, through popular slogans like “From Saving to Investing” that have accompanied the establishment of NISA¹ in 2014 and the expansion of iDeCo² in 2017. Toshin sales practices, which had been widely criticized, are moving toward the “customer-first” model. Above all, the basic value of Japanese stocks has been enhanced by adoption of the Stewardship Code for institutional investors and the Corporate Governance Code for corporations, both of which have helped strengthen corporate earnings. Overall, the environment for toshin funds to help Japanese individuals build assets is improving.
¹ Nippon Individual Savings Account is an account meant to help residents of Japan save money with tax-exempt benefits. It is modeled after the Individual Savings Account in the UK.
² Nickname for Individual-type Defined Contribution pension plan.
So what are the issues for toshi shintaku going forward? On the basis of international comparisons of investment funds, I would point out the following:
There are too many funds, due to sales practices emphasizing new products.
2. Sales practices
The average holding period of funds for Japanese investors is shorter, again due to sales practices among retailers. The practice of consulting an Independent Financial Advisor (IFA) is not yet developed in Japan.
3. Fewer holdings among the younger generations
According to age-specific comparisons with the US, fund-holding rates among young Japanese are lower, probably due to the low rate of participation in defined contribution pension plans in Japan.
4. Fund governance
Most Japanese funds are of the contractual type and most toshin management companies are not independent, belonging instead to large financial groups of banks, securities houses, insurance companies, etc. That may create some problems for fund management.
I will discuss each of these issues and plans for improvement in detail.
< continued in Part 2: https://investmentjapan.jp/japansbasic/2383/ >