JAPAN - Japanese institutions might be relying too heavily on their brokers for essential research and services, new research by Greenwich Associates suggests.
According to the latest Greenwich report, institutional equity investors in Japan have not experienced cutbacks in sell-side research and sales resources to the same degree seen by their counterparts in other markets around the world.
“Japanese institutional investors are benefiting from the fact that brokers in the country are concerned about maintaining market share, which means that they are willing to provide research and other services to a broad base of investors,” said Greenwich consultant John Webster.
“But the fact that institutions in Japan are relying more than ever on the sell-side to help them achieve incremental returns might place their needs at cross currents with those of their brokers, who are now providing the same level of research and services that they have in past years, but at much lower commission rates.”
The research found several trends seemingly at odds with investment managers’ growing need to generate incremental returns.
Japanese institutions cut their in-house portfolio managers from an average of 9.1 in 2002 to just 7.1 this year and foreign institutions lowered their average portfolio management staffing level from 4.7 to 3.5, putting them on an opposite trajectory from their buy-side counterparts in other markets.
In the US, the average number of portfolio managers employed by institutions rose, as did the number of analysts with most reporting expected continual hiring in 2005.
“Although Japanese institutions clearly recognise the need to find and generate incremental returns in order to enhance investment performance, they are not following the example of institutions under similar pressure in other markets by building the capacity to do so in-house,” Webster said.
“While the immediate dynamics of the Japanese equity market make it possible for them to rely on broker resources for these tasks, the current economics of the sell-side suggest that this might not be a viable strategy in the long term.”
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