One Man’s Fight Against the Lions of Japanese Investing
In a tiny, windowless meeting room high above the streets of Tokyo, Haruhiro Nakano starts to cry. The rail-thin, 54-year-old fund manager, who looks like a faded former J-pop star, has just shared his investing pitch, which sounds so deceptively simple you may not appreciate just how radical it is: Japanese workers, Nakano says, should invest for retirement using the capital markets rather than letting more than $8.6 trillion fester in bank accounts.
In Western financial capitals, what Nakano preaches would make him the equivalent of an ice cream man who sells only vanilla. Invest in a wide range of stocks and other assets, he maintains, hold them for the long haul, and buy more during market dips. But this is Japan, home of an asset-price bubble that erased trillions of dollars in wealth when it burst in the early 1990s, creating a generation of people who believe stocks will only go down. This is the country where two “lost” decades of deflation made it sensible to keep savings in cash, where buy-and-hold investing has few proponents.
Not even the world’s most intractable demographic predicament has stopped Japanese people from sliding slowly toward financial hardship, frozen into inaction by their own cautiousness. Japan’s population will shrink by more than 27 million, or about a fifth of its current level, by 2053. By that time, almost 40 percent of those who remain will be age 65 or older. And yet, while U.S. households have 47 percent of their assets in stocks or mutual funds, their Japanese counterparts have only 15 percent.
Nakano, his voice trembling, wipes away tears as he recalls what his mentor, Atsuto Sawakami, Japan’s first evangelist of long-term investing, said to him one day years ago. Nakano told Sawakami he wanted to quit trading junk bonds and derivatives—which he saw as serving no public good—and follow Sawakami’s path by setting up a low-cost mutual fund company akin to Vanguard Group in the U.S. “He said, ‘I’ll do absolutely anything to help you,’ ” Nakano recalls.
In Japanese financial circles, Nakano and a couple of like-minded asset managers are known as the “herbivore” investors. The label is derived, half-jokingly, from the concept of “herbivore males” in Japan, men who are passive and shy in the company of women. The idea is that investments can be structured around the slow and steady accumulation of assets; it doesn’t have to be a dangerous, high-stakes game where the hunter eats its prey.
But Sawakami also had a warning for his pupil: Following this path means sacrifice. He was right. At a price, Nakano has been taking on his own society ever since, trying to sell something almost nobody wanted. For a long time, he was a figure of ridicule as he peddled his investment strategies. “People would sneer,” says Shoko Shinoda, a fund analyst at Rakuten Securities Inc.
Until now. Saison Asset Management Co., which Nakano founded in 2006, turned its first profit three years ago—partially helped by a partnership with the operator of Japan’s more than 24,000 post offices—and surpassed 200 billion yen ($1.8 billion) in assets last year. Rising equities have brightened the economic picture: The Nikkei 225 Stock Average has more than doubled under the stimulus policies of Prime Minister Shinzo Abe since he took office in 2012.
These days, Nakano has become something of a role model in Japan, an industry veteran steeped in the wisdom that, for the fortunate, comes out of conflict. “I had so many battles,” he says, recalling the years he spent fighting people within his own group and the times he was banished to other divisions to toil in exile. Along the way, he would turn again and again to Sawakami for guidance—and also discover the two other herbivores hiding in the financial forest.
A career in asset management wasn’t foremost in Nakano’s mind as a teenager. Looking back now, he characterizes himself as a “low-level delinquent” and poor student in high school who, after failing to get into a more prestigious institution, studied commerce at Meiji University in Tokyo. He also played racquetball, went to matchmaking parties to meet women, and read novels about heroic Japanese businessmen—a popular genre in the boom times before the bubble burst.
In the late 1980s, when he joined Saison Group, a fast-growing retail and financial conglomerate, Nakano says he wanted to work in fashion, selling women’s clothes. He had absolutely no interest in the stock market. He says this had nothing to do with his upbringing—even though his father, an ordinary salaryman at a textile trading company, played the market on the side, bought a big house near the Meiji Shrine in central Tokyo with his winnings, and then had to sell the home and move his family to an unfashionable suburb when his stock investments soured.
When Nakano arrived at Saison Group, its investment arm, like so many of its peers, was increasingly speculating in the markets. He started at one of the company’s financial units and in the third year of his career began investing in the securitized debt of leveraged buyouts. Nakano found managing money exciting. He became devoted to his job and proud of it. As well as handling bond funds, he got involved in some of the hottest derivatives trades of the day, including being one of the first people in his company to do yen swaps. He did a lot of arbitrage and likens the time to working at a hedge fund.
One day, more than a decade into his career, one of his friends shocked him by suggesting Nakano’s job had no meaning. “I’d thought I was cool,” Nakano says. “I was moving big money. It was creating big returns. And Goldman Sachs would take me out to places I ordinarily wouldn’t be able to go to, places like Ginza”—a fashionable and expensive area in central Tokyo. “But this person said my work was supremely uncool.”
After that, Nakano came to think that what he was doing was little more than speculation. “Winning and losing in the market isn’t necessary for society,” he says. “I still think hedge funds are unnecessary. What does asset management exist for? That’s really the fundamental question of finance.”
Nakano decided it was time to change. He wanted to sell mutual funds to working people to help them prepare for retirement. Institutional investors need to show profits every year, he says, but individuals can wait a lifetime, making long-term investing possible. “I wanted to do an honest form of asset management,” he says. “I was nearing 40, and I wanted to devote the rest of my life to that sort of work.”
In 1999 he thought he’d found the answer when Credit Saison Co., then the credit card arm of Saison Group, worked with Bear Stearns Asset Management Inc., which had a money management license in Japan, to create a mutual fund. It was called Miraizu, which means “vision for the future.” The securities companies that marketed and distributed the fund pulled in many billions of yen at first. Miraizu performed well, but even so, investors withdrew their cash quickly. Six months in, none of the brokerages would sell the product; they wanted to promote new funds.
That was Nakano’s first real experience with Japan’s mutual fund industry. “I was extremely disappointed,” he says. “I’d put my hopes and dreams into that fund. I thought that if we said it was for true long-term investing, people wouldn’t pull their money so quickly.” He didn’t know where to turn.
Then, in 2000, Nakano happened on an article about someone named Atsuto Sawakami. By that point, Sawakami was on his way to becoming a legendary investor. In 1996 he’d turned his back on an established financial career at the two-century-old Swiss private bank now called Banque Pictet & Cie. to set up Japan’s first low-cost independent mutual fund. Nakano, keen to meet the man, asked a friend for an introduction, but Sawakami refused to meet.
“I basically have no dealings with institutional investors,” says Sawakami, now 70, reflecting on why he turned down Nakano. “They’re short-termist, and I’m a long-term investor. I thought Nakano was a short-termist at first, so there was no need to meet him. It was a waste of time.”
Nakano persisted, and Sawakami finally relented after three attempts. Sawakami listened as Nakano explained how his fund had failed. Then the older man delivered his verdict: Nakano was “stupid” for distributing the fund through brokerages. The only way to do this was to sell directly to customers, Sawakami said.
For Nakano, that was a revelation.
“My story with Sawakami had begun,” he says.
After his first meeting with his soon-to-be mentor, Nakano kept going back to Sawakami’s central Tokyo office, which for many years looked more like a school classroom than an asset manager’s workplace, to learn more. (Back then, Sawakami’s fund managed less than 9 billion yen. Today it oversees more than 320 billion yen.)
Sawakami says he was surprised, and pleased, that Nakano kept returning. Many industry people visited him once and never came back. He realized that Nakano shared his vision and promised to help him. (Neither man envisioned Nakano working for Sawakami as an option, they say, because separately they could do more to expand the industry.)
Reenergized by Sawakami’s blunt advice, Nakano set about establishing his own mutual fund company within Credit Saison. That meant getting Credit Saison’s enigmatic president, Hiroshi Rinno, on board. Nakano wrote him a letter outlining his vision. Rinno, now 75, remembers reading the letter. He called Nakano to his office the same day and approved the plan then and there.
In those days—the early 2000s—getting an asset management license required the approval of Japan’s Financial Services Agency, in contrast to the streamlined registration system in use today. It was a byzantine task, with the FSA providing little guidance, according to Nakano. Even with Sawakami’s help, the process took two years.
Nakano’s goal was in touching distance when he met his first “lion,” an industry veteran who pointed out that selling low-cost mutual funds was no ticket to riches, Nakano says. Rinno had hired Joji Aonuma, a former banker at Citigroup Inc. and Mitsubishi Bank Ltd., a predecessor of Japan’s largest lender, to help boost Credit Saison’s financial business. As Nakano tells it, “Aonuma said we weren’t getting into such pointless long-term investing.” He says the company ended up returning the hard-won license.
“He doesn’t know what he’s talking about,” counters Aonuma, who at 74 still does some consulting work. He says the decision to nix Nakano’s plan came from higher up the chain of command at a time when Credit Saison was in merger talks with two financial institutions, both of which already had asset management arms. (Credit Saison declined to comment.) Aonuma says Nakano didn’t know the reasons behind the decision: “He didn’t know the truth.” Even today, Aonuma is unwilling to recognize Nakano’s success: “Anything he does will end up in tatters.”
After clashing with Aonuma, Nakano was transferred to the company’s credit card business. He saw this as being given what the Japanese call a “window seat”—exiled, as it were, to a desk away from the action, a phenomenon prompted by Japan’s strict labor laws, which make it difficult to fire people. “I wanted to quit,” says Nakano, who describes this as his lowest point. “I did think it was important to be a salaryman at a big company, but I felt I couldn’t keep working there after so much humiliation.”
Nakano showed his perseverance by sticking around, says Ken Shibusawa, a great-great-grandson of the founder of the Tokyo Stock Exchange. Shibusawa is another of Japan’s rare herbivore investors and has come to know Nakano well. “His appearance is very thin, but he’s a man of strong will,” Shibusawa says. “He had this vision for Saison Asset Management, but people around him thought he was crazy because it wasn’t going to make any money quickly,” he says. “I would have said, ‘Adiós!’ ”
Perhaps surprisingly, it was the old rebel Sawakami who persuaded Nakano not to leave Saison. “He told me another chance would definitely come,” Nakano says. He says Sawakami used a Japanese expression for grinning and bearing it: “Keep quiet, and eat cold rice.”
Nakano’s window-seat exile didn’t last long. In 2004, Rinno hand-picked a team to build a new strategy for Credit Saison’s financial business and put Nakano on it. The first leader of the group made the mistake of arguing that Saison was never going to make any headway in finance, angering Rinno. So Rinno put Nakano in charge and told him to devise a more positive plan. Nakano made starting up a mutual fund company the centerpiece of his proposal. Saison Asset was back off the ground.
Once again, Sawakami had been proved right: By not quitting, Nakano would get a second chance to start a mutual fund. But then, once again, right at the finish line, his dream blew up. In a repeat of his clash with Aonuma, Nakano found another lion blocking his path. His direct boss had been transferred, with a former Japanese bank executive appointed in his place. “Another bank man,” Nakano says with a sigh. “He told me that Saison Group wouldn’t be able to do mutual fund business that even banks couldn’t do. He ridiculed Saison Group.” Nakano’s dream was thwarted again.
By now, turning to Sawakami had become a natural reflex for Nakano in times of trouble. So that’s what he did. His disappointment “was a good experience, because it somehow led me to Sawakami,” he says. The older man sprang into action. He made individual and group presentations to Credit Saison’s board to persuade it not to abandon Nakano’s project. Sawakami eventually won over four or five directors. Then he urged Rinno to reinstate Nakano. Rinno, who’d always believed in Nakano’s investing philosophy but was also busy running the bigger business, took Sawakami’s advice.
The eight-year struggle was over. But the work of creating the mutual fund house had just begun. Nakano turned to Vanguard, the world’s largest provider of mutual funds, to help develop Saison’s first one. The Saison Vanguard Global Balance Fund, started in March 2007, invests in Vanguard stock and bond index funds from all regions. The Vanguard partnership meant Nakano’s fund had to stick with indexes and couldn’t go down the road of exchange-traded funds. Even so, Nakano has mixed feelings about ETFs. He says their ability to be easily traded has no benefit for long-term investment.
At the end of June, more than 80 percent of Global Balance Fund’s assets were in U.S. or European stock or bond funds, with only 10 percent of holdings invested in Japan. It charges no initial sales commission, and its management fee of 0.47 percent is less than half the industry average. And performance is strong: It beat 88 percent of peers over the past five years.
Nakano also set up an actively managed fund of funds that in principle invests only in stocks, picking managers who charge customers reasonable fees and favor long holding periods. The Saison Asset Building Tatsujin Fund, as it’s called, had 44 percent of assets in U.S. stocks, 27 percent in European equities, and 12 percent in Japanese shares at the end of June. It’s doing even better than the Vanguard fund, outperforming 90 percent of competitors in the same period. “When we reached 100 billion yen in assets, Sawakami and I opened a bottle of expensive wine, Château Latour, about 30 years old,” Nakano says. “We drank the whole thing in 10 minutes.”
Two funds are plenty, he says, because he doesn’t want to confuse his more than 130,000 customers, who are allowed to invest as little as 5,000 yen per month. Saison Asset distributes both funds itself without bank or brokerage assistance. Because that increases its costs, it needs to reduce other expenses. The company keeps advertising spending to a minimum, drumming up business through seminars, its website, and word-of-mouth.
“He’s serious, he’s true to his principles, and he has passion,” says Hideto Fujino, the president of Rheos Capital Works Inc. Fujino is the third member of Japan’s tiny club of herbivore investors. When Rheos faced redemptions after the global financial crisis, Fujino was forced to sell it—for the equivalent of $31—to secure new capital. He stayed on as an employee and has since turned the company around; it surpassed 600 billion yen in assets last year. “He’s quite a maverick,” Fujino says of Nakano. “He’s very negative about the existing bank and securities company distribution channels. He believes they’re more interested in their own profits.”
But not everyone agrees with Nakano and his like-minded friends, who together wrote a book, Herbivore Investing—Taught by Professional Asset Managers, in 2010. Take Hiroko Ogiwara, a freelance journalist who published a book in September on the dangers of investing. She points out that the Nikkei 225 is still about 40 percent below its December 1989 peak. “What’s happened to those people who’ve been investing little by little since before the bubble burst?” she asks. “You can’t tell the future. If you can say that a rising stock market is a certainty, then sure, you can treat it as a way of saving for the future. But since it’s not, you should only invest money that you can afford to lose.”
Nakano has a quick retort. Ogiwara may be right that Japanese stocks won’t rise, but that would be because the economy doesn’t grow. And if the economy doesn’t grow, then the yen will weaken, eroding the value of money kept in bank accounts. It’s better, he says, to invest in markets around the world, as his funds do—not as a way to gamble, but as a way to preserve and build wealth.
“I chose Saison Asset because it invests globally,” says Atsushi Nakakoji, a 50-year-old manufacturing company salaryman who lives in Japan’s ancient capital of Kyoto and has been a customer of Nakano’s company since 2009. “Nakano has always said that the global economy has always grown. So if you put your money in it, your assets will naturally increase.”
In January the herbivore trio met for dinner in the Akasaka area of central Tokyo. At Sushikou, a small restaurant with a figurine of a paw-waving cat in one corner (a traditional good luck charm), they talked as usual about their industry, their mentor, and the investment beliefs that bind the three herbivores together.
Sawakami “is the granddaddy,” Shibusawa says. “That relationship is very important for all of us. … We have respect for him, but nobody wants to be clones of Sawakami Asset Management Inc., and Sawakami doesn’t want us to be clones.”
Among the herbivores, from all appearances, there’s very little rivalry. To understand why, you need to look at Japan’s mutual fund industry, Sawakami says. It manages about $1.1 trillion in publicly offered investment trusts, with more than 99 percent of the total distributed by brokerages or other financial institutions, but that isn’t the money the long-term investors are targeting. They’re after a much bigger pie: the $13.4 trillion that Japanese people have stashed away in cash, bank deposits, and insurance products. They see themselves as expanding the market, not competing for what’s already there.
Fujino, like the other herbivores, says their job is far from done, but he adds that they have helped create a culture of long-term investing through mutual funds and started to change Japanese people’s views of the stock market. “Investing is generally seen as a carnivore activity,” he says. “It has the image of lions, of winning or losing, and of power. But herbivore gives the image of elephants, zebras, or rabbits—creatures that eat grass, peaceful beings that depend on one another and get on well.”
Indeed, although Nakano, Shibusawa, and Fujino may seem like outliers in Japanese finance, they’ve found an ally in Abe, who wants to inculcate a culture of long-term investing to stave off a pension crisis and maximize the country’s wealth. In a sign of the prime minister’s intentions, his government last summer reappointed FSA Commissioner Nobuchika Mori, known for his pointed criticism of Japan’s financial-services industry, to his post.
In a speech to the Securities Analysts Association of Japan in April, Mori in effect called for the lions of finance to become more like the herbivores. Financial institutions in Japan, he said, “have focused on collecting fees with little regard for customers’ interests. As a result, customers find it difficult to build up their assets through investment. Does a business model like this deserve to be preserved in our society?”
Abe’s government is backing the herbivores, but many others are taking different paths. Nomura Asset Management Co., the largest mutual fund manager in Japan with about $274 billion in publicly offered investment trusts at the end of November, provides a wide range of products to customers, including ETFs and index funds, seeking to meet all needs, says Yukio Hirakawa, a senior manager at the company. Independent fund houses and the major firms each have different merits, says a spokesman for Daiwa Asset Management Co., who declined to be identified. Daiwa Asset oversaw $146 billion in publicly offered investment trusts at the end of November, making it the No. 2.
Whatever the case, Mori isn’t waiting around. He started a program to encourage long-term investing that began in January and has set criteria for funds to be eligible. Mori has ruled out leveraged products, as well as funds that pay monthly dividends, have a short-term focus, or are too expensive. In fact, 99 percent of existing funds didn’t make the grade when the FSA checked in March 2017. But Nakano’s two funds did. “I have exactly the same anger that’s raging inside Mori,” Nakano says. “Most Japanese mutual funds are messed up.”
Although Nakano is happy to have Mori on his side, the years of struggle have taken their toll. He’s passionate about asset management, but it’s become everything for him. “I can’t really think of a method of self-expression for me that’s not this job,” he says. He’s often unemotional in his personal life, he says. “What do I do in my private life?” he asks. “I don’t have a private life. My private time is all eaten up. My private life is broken.” Nakano’s first marriage, in 1992, ended in divorce about six years later. He remarried in 2016, has no children, and lives in Toyosu, a well-to-do area dotted with luxury apartment high-rises that sits on reclaimed land near Tokyo Bay.
For more than a decade, while the lions in Japan’s financial forest were enjoying their weekends, he’s hosted seminars across the backwaters of the archipelago, from snowy Hokkaido to the beaches of Okinawa. Nakano, a natural storyteller who’s published more than 20 books preaching his strategies, weaves in lessons learned during his youth, as well as the life story of his father and his boom-and-bust relationship with the stock market. He says change must come now before it’s too late. “This is really the last chance,” he says. “If we fail this time, I don’t think we’ll get another chance.”
Redmond is Japan markets editor, Takeo is an economy reporter, and Sano is an automotive reporter, all at Bloomberg in Tokyo. With Jason Clenfield, and Sarah McDonald.