Japanese investment trusts and conclusion
Because of bank encroachment, securities firms may see their share of bond underwriting fall, but their grip on investment trusts seems secure for now. Investment trusts are Japan's version of American mutual funds , and they provide the Big Four with 15 percent of their income.
Securities companies used to run investment trusts directly, but the Ministry of Finance forced them to turn trusts into subsidiaries after conflicts of interest lead to gross mismanagement in the early 1960s.
However the move from direct control - to control via a subsidiary - has not really improved the lot of investors in these trusts. Although American securities firms like Merrill Lynch run mutual funds, the largest families of American funds are run by firms like Fidelity and Vanguard which aren't really brokerages.
In Japan the situation is different. The subsidiaries of the Big Four control over 75 percent of total investment trust funds.
These Japanese firms, like their American counterparts, offer a variety of funds. Open-end and closed-end funds both exist in Japan, but the closed-end variety dominate. Stock, bond and balanced investment trusts all are available.
However partly because of poor investment returns, Japanese investment trusts control much less money than American mutual funds. American mutual funds control about $2 trillion while Japanese investment trusts control less than $500 billion.
Japanese equity funds have been especially poor performers. In the 1980s when the Nikkei average appreciated at an average annual rate of 21 percent, most equity investment trusts returned approximately four percent annually.
There are many reasons for this poor performance. First the investment trusts suffer because of they are subsidiaries of securities companies. Thus the trusts become dumping grounds for trading errors and undersubscribed issues. Also the securities company can generate commission income through excessive trading of trust assets.
There is evidence of churning at the trusts. Investment trusts own only about 4 percent of the market, but they account for about 10 percent of the exchange's turnover.
Finally many so-called equity funds aren't really equity funds because they often have only 40 percent of their assets in stocks. Equity levels are kept low because managers say they need cash for redemptions, or that their clients really don't want the risk of full investment in stocks.
With poor performance like this, you might ask, "How do investment trust companies get away with this? "
A lack of competition is a big reason, but a lack of information is another.
It is difficult or impossible to get comparative performance ratings on Japanese investment trusts - the investment companies just won't give it out. Complex redemption schemes also make it difficult for outsiders to determine actual returns.
But things may be changing. A few Japanese investment companies have made the bold step of naming the person in charge of the fund, and Japan's first no-load fund recently appeared. Still most funds have heavy loads and are managed by nameless and unaccountable individuals.
So there's a sketch of the banks, governmental agencies, insurance firms and securities companies that are the major players in Japan's financial world.
Although many of these institutions are huge, some of them are like lumbering giants that have grown fat in a cozy, protected domestic environment.
Global competition has pushed Japanese industry to become innovative leaders in manufacturing, but protection has lead to problems for Japanese financial institutions.
This is bad for Japanese investors and borrowers, but deregulation may provide opportunities for Japanese investors and foreign providers of financial services.