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Meager incentives mar growth prospects for Japan fund managers

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Japan’s fund management sector needs to develop attractive products focused on fast-growing Asian economies and shift to a more incentive-based compensation structure to attract key talent, add clients and lift profit margins, according to a white paper by Casey Quirk and the Nomura Research Institute.

The white paper, The Sun Also Rises, recommends that Japanese asset managers make significant changes in their business models to strengthen their competitive position.

While Japan’s fund managers operate in the world’s third-largest pool of professionally managed assets and enjoy favoured status at home, approximately 80 per cent of Japanese mutual funds generate insufficient fee revenue to cover costs.

The overwhelming reliance on domestic products means they are shut out of the growth opportunities from increasing interest in global investments, and their salary-driven compensation structure is inflexible, according to Casey Quirk and NRI.

Profit margins for Japanese fund managers were approximately 20 per cent, compared with over 30 per cent for their US counterparts and almost 40 per cent in Europe, according to the analysis by Casey Quirk and NRI for the most recent data available.

Moreover, due to the salary-based structure of Japanese asset managers, overall compensation as a percentage of total expenses rose even as revenue fell during the financial crisis. By contrast, compensation among US money managers fell relative to total expenses as bonuses were cut.

“Japanese managers suffer from a profitability gap with their global counterparts,” says Yariv Itah, partner at Casey Quirk. “More of them should be looking for ways to modify compensation structures while remaining faithful to their core cultural tenets.  Firms that wish to attract top talent and compete effectively at the global level simply do not have a choice.”

“Changing the compensation culture is vital for Japan’s fund managers to attract and retain key talent necessary to upgrade the investment and product development processes,” adds Sadayuki Horie, senior researcher for NRI. “That, in turn, would allow the firms to introduce Asian region equity products that would attract Japanese and international investors.”

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