Abe days are here again: Hedging may tempt more Europeans to invest in Japan

Japan funds domiciled in Europe saw a net inflow of €13.6 billion (US$19.0bn) in 2013, compared with a net outflow of €2.1 billion in the previous year

May 29, 2014 9:35 IST | India Infoline News Service
The strong buying of Japan funds has maintained some of its momentum into the early months of 2014, even if equities have given up some of last year's spectacular Abenomics-inspired gains. According to the May edition of The Cerulli Edge-European Monthly Product Trends, this suggests that investors are willing to take a longer-term view, and asset managers could exploit this demand.

Japan funds domiciled in Europe saw a net inflow of 13.6 billion (US$19.0 billion) in 2013, compared with a net outflow of 2.1 billion in the previous year. Together these funds are now worth more than 61 billion. The equivalent figure for the United States is 587 billion, and even after adjusting for the fact that the GDP of the United States is far larger, it suggests that Europeans are underinvesting in Japan.

"2013 was also a bumper year for the Japanese markets and Schroders, Invesco Perpetual, and Aberdeen Asset Management were among those who saw their Japan funds surge. The benchmark Nikkei 225 soared 59% but remains cheap relative to its peak," notes Barbara Wall, Cerulli's Europe research director. "It could double from its current level, and still be 30% below its record of 38,957 set a quarter of a century ago. This is in sharp contrast to other major economies, notably the United States and Germany, which have recently seen their stock markets hit all-time highs."

Angelos Gousios, a senior analyst at Cerulli Associates points to growing doubts about the economy, and another fundamental issue affecting the logistics of investing money into Japan: the fluctuating yen. "Asset managers are now catching up with the need to offer hedged funds. Last year, WisdomTree pointed the way forward with its U.S.-domiciled Japan equity exchange-traded fund (ETF). It saw an inflow of more than US$9 billion, reflecting the strength of the market for the right product at the right time. Perhaps more asset managers need to offer a hedged version of their funds in order to encourage retail investors to buy into Japan."

Other Findings:

Passive funds saw a net new inflow of 3.8 billion in March, which brought total net new inflows for the first-quarter to almost 15 billion. Lyxor was the best-selling European ETF provider in the year to March, with 2.6 billion of net new flows. This compares with just 890 million for the whole of 2013. The France-based manager now has a marketshare of 11.3%, and is catching up with Deutsche Bank's db X-trackers, Europe's second-largest ETF provider, which has an 11.7% marketshare.

Rising tensions in eastern Europe in the wake of the Ukraine crisis saw emerging market equities experience a third month of outflows in March, losing 1.3 billion. That brought the total outflow in the first quarter to 4.6 billion. J.P. Morgan Asset Management is, however, standing firm on Russian and Ukrainian equities, and believes that the situation will be resolved in the near future.

The debate over systemic risk in asset management has shifted away from "manager versus fund" to criteria such as when a fund becomes systemically important. The Financial Stability Board (FSB), which monitors and makes recommendations about the global financial system, suggests that all investment funds with net assets of more than US$100 million should be included. But the European Fund and Asset Management Association (EFAMA) argues that other factors such as leverage are more important than size.

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