The Risky Japan Funds Sparking Financial Regulator Concernby and
Funds bundle investments in stocks, bonds, exchange rates
FSA sees `mismatch' between risky products, elderly buyers
Japan’s financial regulator is concerned that banks and securities companies are selling complex funds that charge high fees to individuals who may not understand the risks, and it’s talking to the firms about whether the sales are appropriate.
Funds that bundle investments in assets from Japanese stocks to U.S. high-yield debt with wagers on currencies are sold by the nation’s largest brokerages and banks. Declines of more than 20 percent in emerging-market currencies against the yen in the past year have left owners of so-called double-decker or layered funds with big losses.
Investors are being forced to take more risks to secure returns after unprecedented monetary stimulus by the Bank of Japan to battle deflation sent yields on sovereign bonds below zero. Double-deckers often give monthly dividend payouts. While that’s an attractive feature for elderly investors at a time when deposit rates are near zero in one of the fastest-aging nations in the world, the products also carry more risks.
“We do believe this area is problematic,” said Toshihide Endo, the director-general of the supervisory bureau at Japan’s Financial Services Agency, in an interview. “The elderly tend to be among the more wealthy, and they buy these types of funds. There is clearly a mismatch.”
Endo said the boards of directors of financial institutions that market double-decker funds should discuss thoroughly who they are selling these funds to and what kind of explanation is required in offering them.
At least 21 trillion yen ($187 billion) of Japanese mutual funds including many double-decker funds offer monthly dividends, and some can pay out of the principal invested, according to data compiled by Bloomberg. For individuals who want to accumulate assets over the long term, getting money each month may not be the best option as it can take away from funds to be invested, according to Endo.
Some of the most popular funds tied to currency bets in Japan are linked to the Brazilian real or Turkish lira. The lira has swung between gains and losses of as much as 20 percent against the yen during the last five years, showing potential risks.
Some bond funds can be bought in as many as nine different currencies or linked to a basket of them. The sales documents sometimes carry pictures of the different flags of the nations whose currencies can be bought, with sporting images used to depict the choice investors face. The funds are being sold as BOJ stimulus pulled down the benchmark 10-year Japanese sovereign yield to a record low of minus 0.1 percent on Tuesday.
Spokesmen at Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc., Daiwa Securities Group Inc. and Nomura Holdings Inc. said they sell funds with currency wagers after carefully considering their suitability for clients.
The prospectuses of layered-funds include easy-to-understand pictures and staff at brokerages use them to explain the funds in simple terms, according to Akio Tsubokura, a spokesman for the Japan Securities Dealers Association, which includes all of Japan’s major securities brokers as members. Under the financial instruments and exchange act, brokers and banks must provide potential buyers with a prospectus that lays out the risks, procedures and fees, according to JSDA’s website. If it’s possible that the investor will suffer a loss, that must be explained in the document prior to signing a contract.
While sales fees on layered funds are among MUFG’s most expensive, such charges are determined on the basis of administrative costs and the resources needed to explain the risk, said Kazunobu Takahara, a spokesman for the bank. At 3 percent, the fee is comparable to what the bank charges on stock funds, he said. Staff in bank branches who sell such funds are part of a specialist team sourced from MUFG’s securities unit and the bank doesn’t sell the funds to investors who prioritize stability of principal, Takahara said.
Sumitomo Mitsui Financial is cautious in selling the funds given their complexity, and they aren’t among the bank’s Top 10-best selling funds, said spokesman Takafumi Sasaki.
Shinji Nakagawa, a spokesman for Daiwa Securities, said the brokerage explains to customers the importance of judging investments from a total return perspective that includes changes in the net asset value and cumulative dividend payouts.
The FSA would prefer the financial industry itself come up with guiding principles for selling such funds rather than imposing rules on it, Endo said. While the FSA isn’t going to tell financial institutions to stop selling what Endo calls “tricky funds,” it doesn’t want them to be their core offerings.
Endo didn’t indicate which banks or brokerages the regulator is talking with.
“The more appropriate funds for the younger generation are quite simple ones that may offer financial companies low fees,” Endo said. “We want companies to create many of those kinds of funds.”