It seems so, well, late-1990s now. But just a few years ago, the biggest Western names in finance were drooling over an investor culture that finally seemed to be coming of age in Japan. Merrill Lynch & Co. bought a local broker and sank big bucks into a branch network, while Charles Schwab & Co. envisioned a broad market for online trading. Morgan Stanley dreamed of selling investment services to the masses. But as Japanese stocks plunged, it all ended in tears. Schwab exited Japan last year, and this year Morgan Stanley closed its only retail branch and Merrill severely scaled back its ambitions.
Then there's Fidelity Investments Japan Ltd. In the mad rush to grab a share of Japan's $1.2 trillion in household savings, it has emerged as one of the survivors among the foreign crowd. Fidelity kept most of its customers even after the Nikkei stock index plummeted from its airy peak of 20,337 on Mar. 31, 2000, to around 9,800 now. "The stock market has taken a lot away," says Bill Wilder, the affable, 20-year Japan hand who is Fidelity Japan's president. But he thinks Fidelity's research-intensive approach to stock-picking has held up pretty well.
Fidelity has certainly outpaced its competition. Its two biggest funds--the $2.51 billion Fidelity Japan Open Fund and the $1.95 billion Fidelity Japan Growth Fund--produced returns of 6% and 5%, respectively, in the first half of the year, while the Fidelity Japan Smaller Companies Fund delivered 12% even as the Nikkei was falling 5% and heavy redemption calls were pouring into most of Japan's 675-odd domestic mutual funds. In terms of assets under management, Fidelity ranks No. 1 among foreign managers of equity mutual funds in Japan, with a 23.1% market share, and No. 6 overall, with a 5.1% share.
To be sure, this isn't 1999. Fidelity's assets under management in Japan soared nearly 300% that year, peaking at $14.6 billion, as Internet fever gripped the land, and the Nikkei jumped 40%. Foreign investment firms expanded rapidly, betting that Japan's fabled conservative savers would abandon their low-interest savings accounts and pour assets into the market. Fidelity expanded its own reach through aggressive marketing and a deal in December, 1998, for 23 Japanese banks to distribute its funds. "In 1999, we all looked like geniuses," jokes Wilder. He admits that he was far too optimistic, projecting that 300% annual growth would continue for years.
When the market cratered this year, Fidelity was better prepared than its rivals to survive the shock. It had $13.3 billion in assets under management as of July 31, up 19.8% for the first half of the year. One advantage: It isn't saddled with a big branch network like Merrill. Instead, Fidelity distributes its 30-plus funds through 117 local banks, brokerage firms, and life insurers, and over its Japanese-language Web site. Also, Boston-based Fidelity has been in Japan since 1969, so it enjoys good brand recognition and acceptance by Japanese officialdom. "Fidelity was here long before Japan got trendy," says Veryan Allen, chief investment officer with AGS Capital, a $40 million hedge fund.
Today, Wilder thinks there are a lot of undervalued companies just waiting to be found by Fidelity's research team. His team visits companies repeatedly, producing new research reports every 90 days. "If you look at 10 companies, you might find one that's worth buying," he figures. Wilder also is looking to add more fixed-income funds to Fidelity's Japan lineup to attract more risk-averse investors.
The big pot of gold for Fidelity is the retirement plans introduced this year in which employees contribute money and defer taxes until they withdraw it. Fidelity already manages about $6.7 billion of Japanese pensions, and as more companies flip over to these plans, it could offer its funds as an investment menu for employees. One problem now is that Japan has very low limits on tax-deferred contributions to such plans, compared with the U.S. Still, with so much of Corporate Japan burdened by expensive pension plans that guarantee returns for employees, the incentive to switch is enormous.
Fidelity isn't seeing the blistering growth it enjoyed three years ago, but it's still making good profits, Wilder insists, though he won't disclose how much. More to the point: Fidelity's success is more evidence that Japan is a very long-term game, and the rewards go to those who stay the course.
By Brian Bremner in Tokyo