December 9, 2012 3:48 am

Japan’s FSA to rule on fund mergers

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Japan’s National Diet, Tokyo©Getty

Japan’s National Diet, Tokyo. The new rule will be submitted to the legislature as amendments to current fund law

Japan’s Financial Services Agency plans to streamline the procedure for mutual fund mergers in a bid to bring down the number of funds that have dwindling assets.

The large number of inactive funds is a “problem” within the Japanese fund industry that needs to be addressed, according to Kosuke Yokoo, Tokyo-based director for collective investment schemes at the FSA’s planning and co-ordination bureau.

“There are over 4,000 funds that are currently being sold to [retail] investors [in Japan],” Mr Yokoo said, noting that only a “very small portion” of them are being actively traded at the moment, however.

“Inactive funds are a problem of the Japanese market,” he added.

Mr Yokoo noted that the fund proliferation situation arose following the abolition of the fund approval system in Japan.

Currently, a licensed fund management company is not required to obtain approval from the FSA to establish a fund.

However, if the fund to be established is a foreign fund, a prior notification may be required, according to Yasuyuki Takayama, Tokyo-based attorney at Clifford Chance.

“In the past, we had such an approval system, but in the stream of deregulation, we abolished it,” Mr Yokoo said. “I don’t think it’s very easy to get back to the old system, considering the current practice of asset management companies.

“Under the registration system, you can create a new fund with low cost [and] little interaction with the authority.

“It seems to be one of the reasons why the number of funds in Japan has dramatically increased,” he said.

The lack of a fund approval system is also often regarded by industry participants as the reason for the emergence of high-risk funds that bear complex structures in Japan.

Another factor giving rise to the large number of inactive funds in Japan, Mr Yokoo said, is the trend-following mentality of the Japanese fund industry.

Japanese investors would dive into one particular product one year and then redeem and be drawn to another product the next, which causes many funds with small assets to be “left in the market”.

In Japan, to merge two funds, an asset manager would have to get consent from most of the investors (50 per cent or two-thirds of them, depending on each case). The FSA’s Mr Yokoo says the regulator is considering scrapping that requirement to make fund mergers easier, in the case where the investment portfolios of the two funds are similar.

“In the ordinary process, you have to request approval from investors, but I think in some cases, such approval is not necessary,” he said.

Mr Yokoo notes that the new rule will be proposed as part of the amendments of the current fund law. Once the potential changes under consideration are finalised, an amendment bill to the Investment Trust and Investment Corporation Law of Japan will be submitted to the National Diet, possibly as soon as early 2013.

Mr Yokoo believes the fund proliferation situation puts a burden on asset managers in terms of operating costs. But Xavier Meyer, Hong Kong-based head of product development and coverage for Asia Pacific at BNP Paribas Investment Partners, warned that fund mergers can be time-consuming and costly for asset managers as well as distributors. “Apart from the asset managers, implementing a [fund] merger can also be time consuming and costly for the distributors in some markets,” said Mr Meyer, citing regulatory constraints and communication, as well as operational and information technology impacts.

Mr Meyer also points out that it is crucial to make sure that investors are well informed of the reasons behind a fund merger.

“While it can play positively if well handled, it may also backfire in case of miscommunication … all the more if the local market is not used to seeing a lot of fund mergers,” he said.

Kylie Wong is a reporter on Ignites Asia, a Financial Times publication, where this article first appeared

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