Article from Reuters
Thu Feb 2, 2012 11:37pm EST
* Japan's mutual fund market 8th-biggest in the world
* Inflows into new funds lowest on record -Lipper
* Market hit by Europe debt crisis and yen strength
* Some signs of rare inflows into Japanese stock funds
By Chikafumi Hodo
TOKYO, Feb 3 (Reuters) - Japan's $752 billion mutual fund market is in a slump, with inflows from cash-rich retail investors drying up rapidly after they suffered investment losses of $169 billion over the past two years, hit by Europe's debt crisis and the yen's strength.
The market, the 8th-largest in the world and equivalent in size to the Turkish economy, can regain the confidence of retail investors wary of buying new mutual funds, analysts say, but it will take time.
Meanwhile asset management firms, which keep structuring new products in a bid to lure investors, need to watch moves by Japan's financial regulators to tighten rules on sophisticated products, including funds focused on dividends.
Hitoshi Matsuoka, head of retail sales at BNY Mellon Asset Management Japan, said the domestic mutual fund industry is seeing the biggest fund outflows from retail investors since the financial crisis triggered by Lehman Brothers failure in 2008.
"We are seeing something similar to outflows seen after the Lehman shock. It could get worse, and we may see an annual net outflow this year," Matsuoka said.
Japanese individuals hold some $15 trillion in assets but less than 5 percent goes into the mutual fund market. Most stays in bank and postal deposits, which are seen as safe but pay virtually no interest.
Much of the investment by the funds goes into foreign equities and bonds, seen as attractive in light of Japan's meagre interest rates and slumping share prices. Tokyo's Nikkei average lost 17 percent last year.
But the funds have suffered from volatility created by the euro-zone debt crisis. Meanwhile the yen strengthened 5 percent against the dollar and 8 percent against the euro in 2011, eating up the value of investments held in foreign currencies.
Japan's market mutual funds, known as investment trust funds or "toushin", attracted net inflows in 2011 for the 8th consecutive year, although it has seen outflows in recent months. A slew of data shows mutual fund buying by retail investors is shrinking.
Japan-domiciled equities funds suffered net outflows in December for a third straight month, the first such sequence in nearly 13 years, Investment Trusts Association data shows.
A poor investment performance stemming from the strong yen and weak global share prices has weighed on the overall asset size of the market, which was near a 2-1/2-year low at the end of December of 57.3 trillion yen ($752.46 billion), almost 14 percent below the 2011 peak reached in April.
Finance Ministry capital flows data shows net purchases of foreign assets by domestic investment trust funds plunged to 359.6 billion yen last year, just one-tenth of the inflows of 3.95 trillion yen in 2010.
In addition, the amount of initial inflows into newly launched mutual funds fell to 1.63 trillion yen in 2011, down 32 percent from the previous year, data from Thomson Reuters' Lipper showed. It was the lowest since Lipper started compiling the data in 2004.
SOME LIGHT IN EQUITIES FUND
Fund industry experts say the pace of outflows is still modest, but they feel retail investors have become too cautious about making new investments.
"There is less appetite for buying mutual funds because investors really cannot tell when the current underlying bearish market sentiment will end," said Hisashi Kaneko, a senior researcher at Nomura Research Institute.
"The market needs to stabilise considerably for investors to regain their confidence towards investing in mutual funds."
Both global and domestic share prices have been recovering since the start of the year, although there are few signs of inflows returning.
Asset management companies and fund distributors are becoming reluctant to market sophisticated products such as dividend-oriented funds and so-called double-decker funds as Japanese regulators tighten rules on selling such products, requiring investors to be given a full explanation of the risks.
The asset size of the country's mutual fund market has jumped sharply as investors flocked into double-decker mutual and dividend-oriented funds that started to be offered in 2009.
Double-decker funds bundle high-return assets with high-yielding currencies to achieve attractive yields.
Kazutoshi Inano, chairman of the Investment Trusts Association, said the move by regulators could initially reduce offerings of such products, but the industry is moving on the right track in tightening sales regulations.
"Obviously this kind of measure won't push up sales, but I'm not worried that it will result in sales being pushed down drastically. Investments will return to these kind of products once when the market becomes familiar with them," Inano said.
Now asset management firms are looking to attract inflows by offering mutual funds that invest in Japanese equities, which have been drawing some demand.
"Domestic equities funds are gaining popularity -- a trend we haven't seen for the last few years," said Akinori Hirose, executive director at Daiwa Fund Consulting.
"There are many Japanese equities mutual funds which generate high returns. Investors are focusing on funds which invest in selected numbers of companies, hoping for many undervalued Japanese stocks to rebound strongly this year." ($1 = 76.1500 Japanese yen) (Editing by Michael Watson)
Article from Reuters