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Japan ETF firms must get creative as BOJ offers US$2.6b
[TOKYO] As the Bank of Japan pushes the exchange-traded fund industry to design products that don't exist, the biggest limit on what can be created is whether they work as investments.
So says WisdomTree Investments Inc's Jesper Koll, who's part of the posse rushing to develop new ETFs after the central bank said it would allocate US$2.6 billion a year to funds tracking companies "proactively making investment in physical and human capital." Don't worry too much about that definition, says Mr Koll. It's just a broad guideline, and investors can choose how they tackle the challenge, as long as the funds deliver good returns.
Take that phrase human capital.
For Mr Koll, this could mean an ETF that picks firms that spend more on, say, research and development. What you probably won't see, he says, is ETFs linked to wage growth, a goal of the central bank and Prime Minister Shinzo Abe. While it would be possible to design such a fund by choosing companies that give above-average pay rises, no sensible investor would pick stocks using just that factor, he said.
"Is that a criteria that's going to give you outperformance? That's highly spurious," Mr Koll said by phone from the northern Japanese island of Hokkaido. "Increasing pay in the macroeconomic framework - increasing pay, therefore you're going to have an increase in consumption spending - makes some sense. In the micro-economic sense, it does not."
The BOJ unveiled the purchasing plans in December, adding the targeted pool of cash to the 3 trillion yen it already spends a year on broader funds. For ETF companies, it's the central bank's latest inducement to focus on Tokyo, where assets under management more than doubled over two years as the BOJ became the biggest buyer in a bid to stimulate the economy.
Mr Koll says the BOJ is doing the right thing by becoming what he calls a sponsor of product innovation. Japan's ETF industry is still in its infancy, he says. Funds are basically linked to three main indexes, the central bank owns half the market and about half the rest consists of products that give day traders cheap access to leverage, according to Mr Koll.
Fewer than 200 ETFs are listed in Tokyo, while the US has more than 10 times the amount, according to data compiled by Bloomberg.
"You're always amazed that every other week, you go into a convenience store, there's a new soft drink on the shelf" in Japan, he said. "But why is it that in terms of financial products, there's been really no innovation whatsoever?"
Japanese financial firms including Nomura Asset Management Co and Daiwa Asset Management Co intend to start ETFs that meet the BOJ's criteria as early as March, the Nikkei newspaper reported last week without attribution. The central bank is seeking comments from market participants on the new ETF program from Jan 15 to Feb 1, it said this month.
Until the new ETFs are designed, the BOJ said it will put the money in funds tracking the JPX-Nikkei Index 400, a government-backed stock gauge started in 2014 that chooses companies based on return on equity and operating profit. It will take time for new products to win the central bank's cash, Mr Koll said.
A year from now, most investments under the programme will probably still be in the JPX-Nikkei 400, he said. The JPX-Nikkei gauge dropped 0.9 per cent in the morning session in Tokyo on Tuesday, while the benchmark Topix index fell 0.8 per cent.
WisdomTree has about US$46 billion in assets.
Its Japan Hedged Equity Fund is the second-largest US ETF tracking Japanese stocks, with about US$13 billion under management. Mr Koll previously led equity research at JPMorgan Chase & Co in Tokyo before becoming head of WisdomTree's Japan unit last year.
"You and I define" what the BOJ's wording means, said Mr Koll, who notes that capital expenditure could mean investing in anything from building new factories to information technology and intellectual property.
"This is a question of being creative."