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The report is the inaugural result of the collaboration by Cerulli Associates, a global analytics firm specializing in asset management and distribution trends, and NRI, a leading provider of consulting services and system solutions.

Sub-advisory arrangements can take two basic forms, either in a discretionary mandate (¥12.4 trillion, US$126.5 billion, as of June 30, 2013), or a fund of funds brief (¥15.0 trillion). Hybrid arrangements account for another ¥12.1 trillion assets under management (AUM). The sub-advisory market offers ample opportunities for foreign managers, particularly in areas like foreign equity and foreign real estate investment trusts where sub-advised funds account for more than 90% of AUM.

"Gradual diversification of Japanese banks' portfolios from Japanese Government Bond (JGB) to foreign securities and changes to pension fund governance spell greater opportunities for foreign managers," said Yoon Ng, Asia Research Director at Cerulli Associates. "The strongest interest for advisory products will come from asset classes like foreign fixed income and foreign equity, followed by emerging markets.”

"Foreign managers wanting to break into the Japanese market as a sub-advisor should target their sales activities at major investment trust companies as well as pension funds," said Sadayuki Horie, Senior Researcher at NRI. "Pension funds have started increasing their use of foreign managers, even for those without a local physical presence. It is crucial for foreign managers to ensure that these institutions are aware of where their expertise lies as they are on the lookout for distinctive asset managers from around the world.”

Key observations from the report on the Japanese investor landscape include:

- Japan's pension funds are the country's largest institutional investor bloc with total assets of ¥277 trillion, as of March 31, 2013.
- Financial institutions' securities holdings, which totaled ¥823 trillion as of March 31, 2013, were predominantly domestic government bonds.
- Changes to securities taxation will encourage growth in the investing class, increasing demand for new products and outsourcing opportunities.
- Foreign asset managers must comply with highly idiosyncratic Japanese business processes and provide superior service to their clients.
- As Japanese asset managers are increasingly outsourcing back-office functions to cut costs, foreign managers that embrace business process outsourcing (BPO) are better positioned to win new business.
- The reform plan of the Government Pension Investment Fund could have substantial impact on public pension fund business and increase demand for high alpha products & alternative investment products.

Press release

www.cerulli.com

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