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U.S. funds head for Japan
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April 6, 1999: 10:30 a.m. ET
T. Rowe, Alliance Capital, and Fidelity are eyeing an estimated $10T in assets
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NEW YORK (CNNfn) - A record number of U.S. fund companies and investment firms are forging partnerships with Japanese financial institutions to sell mutual funds and other products in the country.
From T. Rowe Price to Fidelity and Goldman Sachs, the companies are lured by a virgin market in Japan where most people are wary about investing and keep their money in the bank. At stake is an estimated $10 trillion in assets.
"There are opportunities that are exploding in overseas markets," said Ben Phillips, a consultant with Cerulli Associates, a Boston research firm that completed a study about the ventures.
About one-third of all international partnerships are in Japan, where deregulation in 1996 allowed international money managers to offer products in the country for the first time.
The new rules require international management firms to have a registered subsidiary in Japan, managed from within the country.
Other U.S. companies like Goldman Sachs, Alliance Capital Management and Fidelity Investments got their foot in the door years ago before the changes by opening up offices in Tokyo and selling products through banks and brokerages.
Most Japanese have defined pension plans, but the government has called for new regulations for the Japanese equivalent of 401(k)s, Phillips said. Fund companies are allowed to sell 401(k) or mutual-fund products under the regulations, and most of the new plans involve both, he said.
"The line between 401(k)s and mutual funds is blurring," he said.
A door opens for fund companies
"The Japan market has really taken off," said Duff Ferguson, a spokesman for Alliance, a New York-based fund company that manages $268 billion in assets in the United States.
Alliance has the second-largest operation in Japan behind Goldman Sachs, with $4.3 billion in assets.
(Goldman Sachs, which leads the pack among U.S. companies in Japan with $24 billion under management in the country, declined to comment because of plans for an initial public offering in late spring or summer).
While Alliance offers a range of equity and bond funds, Ferguson said most Japanese investors prefer high-yield global bond funds to take advantage of favorable interest rates.
In another big deal announced in January, T. Rowe Price said it would create a new company in Tokyo with Sumitomo Bank and Daiwa Securities to market products for institutional and individual investors. T. Rowe Price bought a 10 percent stake in the newly-created company for $16 million.
"It's definitely a long-term challenge to turn Japanese savers into investors," said Steven Norwitz, a vice president at T. Rowe Price.
While about 75 percent of the assets will be invested in Japanese securities, T. Rowe Price created a new partnership with Robert Fleming Holdings of London to manage the other portion of the assets that will be invested in international securities, Norwitz said.
Will the partnerships succeed?
Not everybody is so convinced that these new ventures will succeed. The Cerulli study found that more than half of the international ventures fail to last more than three years.
Japan's problem is that its financial services sector is undergoing consolidation, Phillips said. For example, when Yamaichi Securities failed in 1997, its joint venture with Glasgow-based Murray Johnstone also failed.
"Insurers will merge, banks will buy banks," Phillips said. While $10 trillion is the lure for U.S. companies, there's also the issue of trillions in underfunded pensions and bad loans.
Phillips also pointed out that Tokyo is an expensive city, with high overhead and distribution costs.
"Japan has huge potential," Phillips said. "(But) tapping that potential is a long exercise that will take years, if not decades. It will be expensive."
Fund companies are more optimistic about the future. Norwitz, of T. Rowe Price, said the fund group has 17 percent of its international assets invested in Japan, so it is familiar with the market and sees vast potential.
"We think long-term the Japanese market is going to be just fine," Norwitz said. 
-- by staff writer Martine Costello
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