The vote of confidence obtained by the Democratic Party of Japan (DJP), Japan’s opposition party, at the election for half of the Upper House seats, is slowly being felt in political circles. On 10 August, the DPJ teamed up with two smaller parties to push for the postponement of the privatisation of Japan Post, which is to start in earnest from 1 October. At that date the 10-year privatisation schedule is to enter its first phase, with the break-up of the entity into four parts: a mail courier, an insurance company (Kampo), a savings bank (Yucho) and a post office management entity.
Notwithstanding this latest twist in the reformist agenda of former prime minister Junichiro Koizumi, Japan Post has begun on a path of transformation which appears to be the road of no return. The main implications for the investment industry are expected to be twofold:
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further diversification in the investment portfolios of Kampo and Yucho, and
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the increasing importance of Yucho as a distributor of investment funds to the Japanese retail market, serviced by the vast post office network of around 24,000 branches.
With regard to the first, given that the combined assets of Kampo and Yucho amount to approximately $3trn, even a slight shift in their investment portfolios from Japanese government bond investments to other asset classes would provide opportunities for investment management firms. The prospect is raising worries about the impact on JGB prices, which are the subject of research panels as I write.
With regard to the second implication, Yucho is rapidly developing into a powerful distributor of investment funds in Japan. Since the first funds appeared on Yucho’s shelf in October 2005, it has collected more than $8bn in fund assets, attaining a 1% market share in less than two years. With the number of post office outlets selling funds increasing (1,155 branches now offer funds), about $500m is raised each month. This puts Yucho into the same league as the larger banks that were allowed to start selling investment funds in 1998.
Looking at the Yucho fund line-up, by far the most popular product has been the six asset classes fund managed by Nomura Asset Management, investing in domestic and non-domestic equity, fixed income and listed property.
The product comes in three flavours: a defensive version with a 70% allocation to fixed income and a focus on domestic investments; an aggressive version with a 70% allocation to equities and, the most popular of the trio, a distribution- focused fund with the same tilt to bonds as the defensive fund, but with more exposure to higher- yielding non-Japanese bonds. This fund comprises more than 40% of the assets raised by Yucho so far and together these three account for 55%.
notable recent addition by Yucho is so-called target-year funds. Clients can choose from a set of six funds with target years ranging from 2015 to 2040 (in five-year intervals). These funds automatically adjust their allocation to the various asset classes as time passes, with a lower allocation to equity and a corresponding higher allocation to fixed income instruments as the target date draws near, following the life-cycle concept of investing. The funds pay out income gains twice a year until the target date and switch to monthly pay-out after the target date is reached. The interesting thing is that the target-year product uses exactly the same ingredients as the above-mentioned six asset class funds. But rather than adding four funds to fine-tune the risk/return profile offered by the existing defensive and aggressive funds, Yucho chose to introduce an all-in-one investment solution to investors with relatively limited financial knowledge.
The only thing they need to determine is the date at which they will experience an important life-event, such as retirement. The allocation changes are all automatic, so there is no need for the investor to switch between funds. Investors are supported by a simulation tool that allows them to calculate the expected value by the target date of a single or regular monthly investment into
the fund.
Yucho, which sits at the pinnacle of the trend from savings to investment in Japan, appears to have added a product to its line-up that combines ease of use with a responsible investment policy that fits the investment horizon of the client in question.
Now let’s wait and see whether clients appreciate it enough to enable Yucho to reach its own targets.
Oscar Volder is head of institutional services at ABN AMRO Asset Management in Tokyo
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