Koei Imai, head of ETFs for Nikko Asset Management, tells Emma Cusworth about attracting long-term retail demand for Japan's ETF market while taking advantage of investors' currently predominant short-term goals
In stark contrast to other global markets, ETF assets in Japan shrank in 2009, according to Koei Imai, head of ETFs for Nikko Asset Management. Imai says this is largely due to the falling risk appetite of Japan’s largest financial institutions, still the dominant force in Japan’s ETF industry.
According to his estimates, roughly 70% of assets in Nikko’s ETFs are held by financial institutions. “Decreasing risk appetite has led to net redemptions,” he says. “This is more to do with financial institutions themselves than a changing attitude about the Japanese market.”
Banks in particular have been grappling with issues including a review of accounting rules, which is largely to blame for their non-aggressive risk stance. Despite the fall is assets, however, Imai’s hopes for the Japanese market remain robust. He says: “Individual investors currently hold around ¥1,400trn in total assets. Our hope is that in 10 years, around 2.5% of that money, or ¥35trn, will be allocated to ETFs.”
Imai believes retail demand will be crucial, in order to bolster Japan’s ETF market going forward. There has already been a marked increase in interest and momentum from this segment, which accounts for roughly 10% of Nikko’s ETF assets.
“The growth in individuals’ assets is supportive of continued ETF growth and we remain optimistic. Looking at our Japan REIT ETF, for example, which was launched last autumn, 70% of assets are from individual investors,” he says. “They also have a different holding pattern to institutions.”
Imai explains Nikko is particularly keen to lure middle-aged and elderly individuals who tend to buy and hold investments for the longer term, but are mainly using mutual funds at present.
However, rather than cannibalising mutual fund assets, Nikko is targeting money currently sitting in savings and deposits. Imai says: “People have seen a lot of benefits from holding savings over recent years, but there is increasing recognition that pensions and savings will not continue to grow at historic rates. Many more individuals are therefore waking up to the need for investment.”
The barrier, much like in Europe, is that brokers dominate the relationships with private individuals and prefer higher fee mutual fund alternatives. Imai says: “The challenge is to come up with a strategy to solve that problem. Sooner or later we will need to work out ways of sharing the economic benefit of ETF investment with brokers and banks, but as yet, we have not found a solution.”
Some interesting structures are emerging in other countries including funds of ETFs, but in the meantime, Nikko will continue to focus on building direct relationships and educating individuals in an attempt to entice them into ETFs.
The Japanese regulators have also recognised the pitfalls of an ETF market dominated by institutional investors, whose internal problems are draining valuable assets. Imai explains: “The regulators realise when ETFs are listed and other sub-
products are launched, allowing arbitrage trading, for example, overall market liquidity goes up.” He adds regulators are therefore committed to increasing the level of ETF listings and promoting these products to a broader audience including retail investors.
Since 2007, the Japanese government has been deregulating the market, relaxing some rules and introducing others, enabling ETFs to track indices based on asset classes other than equities, such as fixed income and commodities.
From July of last year, ETFs have also been allowed to take cash contributions and redemptions. Imai says: “Until then, they were only allowed to do in-kind share creations, which given time differences, made operating ETFs on indices outside equities challenging practically.” He adds: “Allowing ETFs to use cash has allowed us to overcome many hurdles, enabling a number of new launches.”
Steps to improve the dissemination of market information also significantly improved transparency, driving a trend towards passive investment. Imai explains: “As a result of increased market efficiency active managers have found it harder to generate positive returns consistently and the general acceptance of passive management has been rising.”
He says banks doing proprietary trading have found it harder to profit from individual stocks and are therefore migrating more to ETF products. Imai adds: “Pension funds are also increasing their passive allocations, although to date, this has mainly been through trust accounts.”
However, ETF turnover remains high suggesting most investors are still using these products to fulfill short-term objectives. Compared to 2008, turnover of Nikko’s 225 and Topix ETFs increased 28.5% and 33.63% respectively in 2009.
Nikko has been leveraging this tactical approach by offering thematic ETFs including its Japan Green Chip 35 fund, launched in April. The fund invests in 35 representative companies involved in key environmental sectors, which are benefiting from deregulation and enjoying keen interest. Since launch, assets have roughly trebled to ¥3.5bn.
“There are pockets of companies in Japan that are quite interesting, particularly in the current market,” says Imai. “These thematic ETFs suit short-term oriented market timers.”
Given the prevalence of short-term traders in Japanese ETFs, Nikko’s strategy will continue to focus on these opportunistic areas. At the same time, Nikko plans to expand its range of broad ETFs to provide the core holdings of individual portfolios in an effort to attract longer-term investors, particularly private individuals.
“Our strategy is to continue to list products such as global index ETFs to give investors access to core asset classes for the medium to long-term, but also to offer thematic products, which are attractive to more active investors,” Imai says.
Koei Imai is head of ETFs for Nikko Asset Management and is responsible for ETF development and promotion. Before joining Nikko in 2006, Imai worked in a number of senior roles developing and managing investment products for a range of companies.
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