Global Investment Funds:
Changes in the Last 30 Years and Future Challenges

October 2016
Kohji Sugita
Research Fellow, Japan Securities Research InstituteSenior Analyst, Japan Investment Trusts Association

This paper is prepared for the participants in the 30th annual conference ofInternational Investment Funds Association based on the author’s report published by
Japan Securities Research Institute in May 2016.
.

Kohji Sugita is Research Fellow, Japan Securities Research Institute, and also Senior
Analyst, JapanInvestment Trusts Association.
He previously worked at Nomura Asset Management Co., Ltd. (NAM)in Japan forabout forty years. His career at NAM included the manager of a department forbusiness and product development, the chief representative of NY office and a director
at a research institute,established by NAM, specializing in investment funds.

Global Investment Funds:
Changes in the Last 30 Years and Future Challenges(Summary)
The commemorative 30th Annual Conference of the International Investment Funds
Association (IIFA), comprised of investment funds associations from countries around theworld, will be held in Japan in 2016.
In this milestone year, this paper analyzes how global investment funds have changed
quantitatively and qualitatively over the last 30 years and examines the challenges for the
future.
The net assets of publicly offered securities investment funds worldwide increased by
28-fold in the last 30 years to US$34.1 trillion at the end of 2015. It is estimated that just under
20% of the securities issued in the world are held via investment funds.
Factors that made this increase possible were: (1) global long-term price increaseof equities
and bonds; (2) growth of household financial assets worldwide; (3) shift ofpensionsystemtowards defined contribution plans, such as in the United States and Australia;(4) rapid growth of investment funds in emerging economies; (5) diversification of
distributionchannels; and (6)the enhanced product lineup for diverse investment environment.
The qualitative changes in the last 30 years had the following trends: (1) globalization; (2)rising cost consciousness(expansion of ETFs); and (3) advances in IT adoption.
Challenges for the future include:(1) to ensure that investment funds make adequate returns to investors, mainly by (i) securing
returns on asset management under the changing economic environment; (ii) increasing
investor returns; (iii) providing additional value other than investment gains; (iv) performing
fiduciary duty; and (v) promoting cross-border fund distribution;(2) to ensure that investment funds that have become large fulfill their social responsibility,
mainly by (i) contributing to improving the quality of the securities market; (ii) developing
ESG investment; and (iii) paying more attentiontolinkto the stability of the global financial
system; and(3) toexplore businessopportunities,mainly by (i) focusing on investment fundmarkets inemerging economies; and (ii) utilizing “FinTech.”1Global Investment Funds:
Changes in the Last 30 Years and Future Challenges

Introduction
The commemorative 30th Annual Conference of the International Investment Funds Association(IIFA), comprised of investment funds associations from countries around the world, will be held inJapan in 2016.1
In this milestone year, this paper looks back athow globalinvestment funds have changed
quantitatively and qualitatively over the last 30 years and what factors caused these changes,
comparing them with the situation in Japan, and examines challenges for the future.
The views and opinions expressed in this paper are solely those of the author.

1. Investment FundAssetsIncreased by 28-Fold in 30 Years
Looking first at the quantitative changes, it can be seen from Figure1. that the total net assetsof
global publicly offered securities investment funds (including exchange traded funds [ETF],
hereafter “the fundassets”) increased by 28-fold from US$1.2 trillion at the end of1985 to US$34.1
trillionat the end of 2015. Despite temporary decreases over the yearsdue to the collapse of the IT
bubble in the early 2000s, the global financial crisis in 2008, and the European debt crisis in 2011,
the fundassets has remained on a growth pathrelatively consistently. According to IIFA, which in2015 modified its counting method and began publishing the fundassetsincluding private placement
funds for institutional investors, the fundassets at the end of 2015 including the private placement
funds was US$37.2 trillion.
As a ratio tothe world GDP,2the fundassets increased from 6.3% in 1985 to 46.6% in 2015 (50.8%
including private placement funds).
Furthermore, global investment fundswere estimated to holdequitiesof US$16.9 trillion3 by a
1

The IIFA 2016 Annual Conference will be held in Osaka from October 24 to 26. An international
investment funds seminar is scheduled to be held in the week before the Annual Conference on October
21 in Tokyo.
2
According to the International Monetary Fund (IMF) World Economic Outlook Database October 2015,
the total nominal GDP of all countries was US$12.27 trillion in 1985 and US$73.18 trillion in 2015.
3
The IIFA tabulates the global investment fund assets by types of products. The breakdown of the
US$37.19 trillion assets at the end of 2015 was as follows (unit: US$ trillion): 15.91 equity funds; 7.83
bond funds; 5.15 balanced funds; 5.07 money market funds (MMF); 0.07 capital guarantee funds; 0.44
real estate funds; and 2.72 others. This includes US$3.18 trillion in private placement funds for2

simple calculation (equityfund assets×90% + balanced fund assets×50%) at the end of 2015, or 27%of the global equity market capitalization at that time (US$62.8 trillion 4 ). Similarly, global
investment fundswere estimated to hold bonds of US$14.2 trillion at the end of 2015 using aformula(bond fund assets×90% + balanced fund assets×50% + money market fund assets×90％),or 14% of
the global bondoutstandingat that time (around US$100 trillion5). Accordingly, under 20% (around
US$31 trillion) of the balance of global securities issued (around US$160 trillion), combining
equities and debt securities,were seemed to be held through investment funds.

Figure 1.Assets of Global Publicly Offered Investment Funds and Their Share of WorldGDP
40,00050%

Global invetment Fund Assets (lefthand scale, US$billion)

45%

Ratio of Investment fund assets to world GDP

35,00040%
30,00035%
25,00030%
25%

20,00020%

15,00015%
10,000
10%
5,000

5%
0%

0
85

87

89

91

93

95

97

99

01

03

05

07

09

11

13

15

Sources: Investment fund assets data from IIFA; ratio to world GDP is calculated using world GDP data from the IMF's"World Economic Outlook Database October 2015."

Comparison with JapanThe assets of publicly offered investment funds in Japan rose by no more than five-fold in 30
years, increasing from 19.97 trillion yen in 1985 to 97.76 trillion yen in 2015. The multiplication
factor was considerably lower than the world’s 28. While the ratio of investment fund assets to GDP
increased from 6.1% in 1985 to 19.6% in 2015,6 this increase was much smaller than the worldwide
institutional investors. As the private placement funds’breakdown by types of products is unknown, theauthor calculated the breakdown by the assets including private placement funds.
4
According to data of the World Federation of Exchanges (WFE).
5
The Bank for International Settlements (BIS) estimated the outstanding amounts of global debt securities
at the end of June 2015 as consisting of US$87.9 trillion fordomestic securitiesand US$21.5 trillion forinternationalsecurities. The BIS states that the two have some overlaps and does not announce their total
value. However, from a figure in the Q2 2015 BIS Quarterly Review, it can be construed that the total
was nearly US$100 trillion.
6
Japan’s nominal GDP was 325.4 trillion yen in 1985 and 499.1 trillion yen in 2015.

3

increase from 6.3% to 46.5%. The primary reason of the small growth in Japan relative to the world
was stagnant equity prices that have persisted in Japan for more than 20 years, as will be discussed
later.
The share of Japanese investment funds’domestic equityholdingsat the end of 2015 to Tokyo
Stock Exchange equity market capitalization was calculated to be 3.9% (23.27 trillion yen/589.79
trillion yen7 ), whereasthe share of investment funds’ domestic bond holdings to the Japanese
domestic bond outstanding at that time was calculated to be 0.9% (10.25 trillion yen/1,101.35 trillion
yen8).

2. Factors Behind the Increase
The significant growth in global investment funds in the last 30 years can be attributed to anumber of factors, including: (1) long-term price increase inglobalequity and bond market; (2)growth of household financial assets worldwide; (3) shift of pension system towards defined
contribution (DC) plans, such as in the United States and Australia; (4) introduction and growth ofinvestment funds in emerging economies; (5) diversification of investment funddistribution
channels; and (6)the enhanced product lineup for diverse investment environment.

(1) Price increase in securities markets
Figure2. shows the trends in equity prices and long-term interest rates in advanced economies in
the last 30 years.
Thoughoverseas

equitypriceshaveplummeted

on

some

instances,

they

have

significantlyincreased over the 30-year period between the end of 1985 and the end of 2015 by:
9.69-fold in the United States; 7.87-fold in Germany; 5.12-fold in France; and 4.63-fold in the
United Kingdom.
At the same time, long-term interest rates in advanced economies have been on a downward trend
relatively consistently, falling from 10.62% to 2.14% in the United States, 10.61% to 2.01% in the
United Kingdom, and 6.87% to 0.50% in Germany (it means bond prices recorded sharp increases).

7

According to the key statistics for domestic stocks of the Monthly Statistics Report, Tokyo Stock
Exchange.
8
Total public and corporate bonds outstanding by the Japan Securities Dealers Association’s “Issuing andRedemption Amounts of Public and Corporate Bonds (January 2016 Update).”4

Figure 2.Equity Prices and Long-Term Interest Rates in AdvancedEconomies
U.S. 969

1,000

Equity Prices (End of 1985=100, End of Each Year)

900

Germany 787

US(S&P500)

800

Germany(DAX)

700

France(CAC400）600

UK（FTSE100)

500

France 512

Japan（TOPIX)400

U.K.463

300
200
100

Japan 148

0

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13

15

12%

Yields of Long‐Term Bonds
10%

US（10 -year government bond annual avg.）
UK（10 -year government bond annual avg.）

8%

Germany（government bond annual avg.）
Japan（10 -year government bond end of year）

6%

4%

2%

0%

(Source: BoJ, Financial and Economic
Statistics Monthly)
85

87

89

91

93

95

97

99

01

03

05

07

09

11

13

15

These rises in securities prices contributed to the strong performance of investment funds(delivery of favorable returns to investors), and accordingly, to increases in the inflow of funds frominvestors.
Incidentally, the author tried to calculate the breakdown of the increase in assets of global
investment fundsfor the 15-year period between 2000 and 2014 for which the author had access tosame criteria data. The result was that the US$19.8 trillion increase in the assets was brought about
by an inflow of money from investors9 equal to US$10.5 trillion (53%), and the rest bymarket value
fluctuations and other factorsequal to US$9.3 trillion (47%).
Comparison with JapanAs Figure 2. shows, equity prices in Japan (TOPIX) increased by a factor of 1.48 between the endof 1985 and the end of 2015, one-sixth of the multiplication factor of 9.69 in the United States.
9

The inflow of funds from investors is calculated by subtracting the redemption amount from the sales
amount. This is referred to as “net sales” by the IIFA.

5

Setting the peak equity price in Japan (end of 1989) at 100, equity prices have halved in Japan (54)whereas in overseas they have risen to 579 in the United States and 600 in Germany as of the end of
2015.
Long-term bond yields in Japan dropped significantly from 6.68% to 0.27% as shown in Figure 2.
(bond prices increased). However, the margin of decline was 6.41% and small compared to the
8.48% in the United States and 8.60% in the United Kingdom. Additionally, long-term bond yields
in Japan fell to below the 2% level in 1999, ahead of other countries. An unfavorable climate formaking new investments in bonds has persisted since then.
Along the lines of the preceding factor analysis of the increase in the global investment fundassets,
the author calculated the breakdown of the portion of the increase attributed to the inflow of funds
from investors and the portion attributed to fluctuations in market prices and other factors.
Of the 46.4 trillion yen increase over the 15-year period between 2000 and 2014 in Japanese fundassets, the inflow of funds from investors was equal to 74.7 trillion yen and the rest was equal to-28.3 trillion yen (including dividend payment). In case of Japan, the fact that fluctuations in market
prices and other factors became negative due to stagnant equity prices as well as payment of highdividends10 made its situation starkly different than the world situation (as was described, theportion of market price fluctuations and other factors attributed significantly and accounted for halfof the increase in the world fund assets).

(2) Growth of household financial assets
Financial assets held by households (individuals), the main clientele of investment funds,
increased in the last 30 years, enabling to increase the portion of risk assets.11 This became a basis
for the expansion of investment funds.
For example, in the United States which accounts for half of the global investment funds, thebalance of household financial assets increased by 6.5-fold from US$10.89 trillion in 1985 to
US$70.33 trillion in 2015.12 Its ratio to GDP grew from 2.5 times to 3.9 times, allowing for thepossession of more risk assets.
In Europe, the total balance of 19 countries in the Euro area increased by 1.4-foldin 11 years from15.28 trillion euros at the end of 2004 (the year that Eurostat statistics trace back to) to 21.67 trillion

10This was due to the impacts of monthly dividend funds. Since 2010 for which the statistics ofJapanInvestment Trusts Association (JITA) are available, 30 trillion yen were paid in dividend paymentsin the six years through 2015. When the Bank of Japan (BoJ) revised its flow of funds statistics in March
2016, the BoJ changed to listing dividends from principals of investment funds and capital gains as
outflows of funds from investment funds to investors.
11
Matthew Fink, former President of the Investment Company Institute (ICI) and author of The Rise of
Mutual Funds, Oxford University Press, 2011 uses a term in his book “a growing middle class” as acontributor to the increase in investment funds in the United States.
12
From Federal Reserve Board“Financial Accounts of the United States” (viewed on April 5, 2016).

6

euros at the end of September 2015.13 Furthermore, the balance of household financial assets inGermany for which euro-denominated statistics are available from 1992 increased by 2.5-fold in 23
years from 2.19 trillion euros14at the end of 1992 to 5.37 trillion euros15at the end of September
2015.
Comparison with JapanThe balance of household financial assets in Japan tripled in 30 years from 572 trillion yen in1985 to 1,741 trillion yen in the end of 2015.16 However, the speed of growth is significantly lower
thanthe 6.5 times of the United States. Furthermore, comparing 1992 and 2015 for which
comparisons including Germany are possible, the balance of household financial assets grew by
2.5-fold in Germany and 3.8-fold in the United States, whereas the rate remained at 1.7-fold inJapan.
Incidentally, there are two factors that cause changes in the balance of financial assets: (i)financial flows (net acquisition calculated by subtracting financial asset disposition fromacquisition); and (ii) market price increases of financial assets.
The reasons behind the slow growth of household financial assets in Japan lie in decreasing
financial flows (i) and a slowdown in the rise of market prices (ii).
Figure 3. compares (i) Japan’s rate of net acquisition of household financial assets (share of therelevant year’s amount of net acquisition of financial assets to the financial asset balance of the endof the previous year) and (ii) Japan’s rate of market price increases of financial assets (share of theamount arrived by subtracting annual financial flows from the amount of the annual increase in thefinancial asset balance (= price increase portion) to the financial asset balance of the end of theprevious year) with those of the United States and Germany.
While Japan’s rate of net acquisition of financial assets in the top graph exceeded that of theUnited States until the 1990s, it has fallen to below 2% since the beginning of the 2000s, less thanthat of not only Germany but also the United States.17
Furthermore, Japan’s rate of market price increases of financial assets in the bottom graph issignificantly lower than that of the United States. The arithmetic mean of the rate of market priceincrease in the 30 years between 1986 and 2015 was 3.9% in the United States versus no more than
0.7% in Japan.18
13

From the Eurostat database (viewed on April 5, 2016).
From Bundesbank statistics (viewed on April 5, 2016).
15
Same source as footnote 13.
16
BoJ’s Flow of Funds statistics (preliminary figures for new system published in March 2016).
17
The decrease in Japan’s flow of funds is believed to stem from a slowdown in economic growth(sluggish growth of personal income) and an aging population (an increase in the population that
decumulates financial assets). However, some note: “The assets of individuals should be thought of as
consisting not only of financial assets but also including real estate and liabilities. The decline in theacquisition of financial assets partly has to do with the fact that funds are flowing to offset liabilities in
response to falling real estate prices.” (Satoshi Nojiri, Head of Fidelity Investor Education Institute)
18
Japan’s rate of market price increase of financial assets may be low as financial assets place a147

Figure 3. Rate of Net Acquisition of Household Financial Assets and Rate of Market Price Increasein Japan, United States, and Germany (Unit: %)8

Rate of Net Acquisition of
Financial Assets

7

Japan
US

6

Germany

5
4
3
2
1
0
85
15

87

89

91

93

95

97

99

01

03

05

07

09

11

13

15

97

99

01

03

05

07

09

11

13

15

Rate of Market Price Increasesof Financial Assets

10
5
0
85

87

89

91

93

95

‐5
Japan
‐10

US
Germany‐15

Source: Compiled from Flow of Funds statistics of each country.

(3) Shift towards DC pension schemes
Looking at the worldwide investment fundassets by country as of the end of 2015 (Figure 4.), theUnited States ranks in first, accounting for approximately half of the worldwide total, and Australia
with a population of 24 million ranks in sixth (Australia ranks in fourth if Luxembourg and Ireland,
the domiciles of offshore funds, are excluded).
Both the United States and Australia are known for their advanced DC pensionschemes. In thesecountries, DC indeed serves as an engine for the growth of investment funds.
For example, the balance of DC assets in the United States grew by 19-fold from US$0.74 trillion
in 1985 to US$14.07 trillion in 2015 ifIndividual Retirement Account (IRA) and employer-basedplans (e.g., 401k) are combined.With regard to the amount of DC assets managed by investment
funds, the amount for IRA increased from US$0.03 trillion in 1985 to US$3.50 trillion in 2015 andthe amount foremployer-based plans to US$3.63 trillion (the 1985 figures for employer-based plans

disproportionate weight on cash and deposits.

8was unavailable), or US$7.13 trillion in total.
As a result, US investment fund assetsheld by DC plans made up approximately 46% of the total
assets of US investment funds and 61% of USequityfunds at the end of 2015.
In Australia, the assets of Superannuation, which is a compulsory DC corporate pension
arrangement19institutionalized in early 1990s, expanded by nine-fold from 0.23 trillion Australian
dollars to 2.02 trillion Australian dollars over the recent 20 years (June 1995 to June 2015).
While accurate statistics could not be found related to what percentage of the Australianinvestment fund assets is made up of Superannuation, given for the fact that the Australianinvestment fund assets was 2.09 trillion Australian dollars as of the end of 2015, the DC pension
share is considered larger than that in the United States.
Incidentally, the US$-denominated Australian investment fund assets increased phenomenallyfrom US$ 3.3 billion 1985 to US$1,521.3billionat the end of 2015 as can be seen in Figure 4.
Comparison with Japan
In Japan, the DC pension scheme was launched in 2001. However, the balance of DC assets as of
September 2015 stood at only around 9 trillion yen. The amount of investment in investment
fundswas around 4 trillion yen,20 accounting for no more than 4% of the 93 trillion yen investment
fundassetsat that time.

(4) Expansion of investment fund markets in emerging economies
In 1985, the IIFA kept investment fund statistics for 12 countries, and not any emerging economy
was included. In 2015, the number of countries rose to 46, of which 17 were emerging economies.21
Figure 4. shows the assets of investment funds by country, its share of the world total, and the rateof growth by separating them into advanced and emerging economies foryears of turning point since
1985.
The composition in which U.S. investment funds make up over half of the world total has notchanged over the 30-year period. However, the U.S. rate of increase since the beginning of the 2000s(between the end of 1999 and the end of 2015) has been 159%, falling below the world total of
194%. In this regard, the U.S. investment fund market is showing signs of maturation.22
In other advanced economies, the domiciles of offshore funds—Luxembourg and Ireland—have ahigh rate of increase (375% and 1,612%, respectively, between the end of 1999 and the end of 2015),
19

According to APRA Insight Issue 2 2007 Special Edition, “Celebrating 10 years of superannuation
data collection 1996―2006,” p. 3,<http://www.apra.gov.au/Insight/Documents/07-Insight-issue-2.pdf>.
20
Both the DC balance and amount of investment in investment funds were taken from the Rating andInvestment Information, Inc., “DC no Ōte Hansha betsu 2015 nen 9 gatsumatsu Shōhin Zandaka”[Product Balance End of September 2015 by Major Sellers of DCs], Nenkin Jōhō [Pension Information],January 18, 2016.
21
The separation into advanced and emerging economies follows the classification used in the IMF’s“World Economic Outlook Database October 2015.”
22
Percentage of households owning mutual funds in the United States reached the 40% range in 2000
andhasleveled offsince then.

9suggesting that the domiciles of investment funds and fund distribution markets had been globalizing
as will be discussed later.
In addition, the rate of increase was high in the United Kingdom, which had introduced Individual
Savings Accounts (ISAs)23 (321% between 1999 and 2015), and the financial center of Switzerland(454% during the same period). As was described in (3), the expansion of Superannuation was thereason for the large increase in Australia (310% during the same period).
In emerging economies, investment fund schemes have been introduced in succession. Countries
such as India and China had noticeably high rates of growth of investment funds. China, whichbecame one of the countries tabulated by the IIFA in 2007, had a balance ranking in seventh in theworld at the end of 2015. Following the global financial crisis (between 2008 and 2015), China’s rateof increase (357%) was the highest among the countries with the top 20 investment funds assetsat
the end of 2015.
In terms of the totals for 17 emerging economies, while their asset share of the world total was no
more than 6.6% at the end of 2015, their rate of increase since the beginning of the 2000s (between
the end of 1999 and the end of 2015) reached 1,139%, far outperforming the 179% total for 29
advanced economies.
It can thus be found that the rate of growth of investment fundsin emerging economies was high,with some countries newly introducing investment funds, and this contributed to the growth ofworldwide investment funds.

23

ISA is the United Kingdom’s savings and investment incentive tax system (system of promoting asset
formation) introduced in 1999, and served as a model of Japan’s Nippon Individual Savings Account(NISA) system.

10

Figure 4. Changes in the Assets of Publicly Offered Investment Funds by Country(Unit of Assets: US$ Billion)
1985
AssetsShare
Advanced
EconomyUnited States
Luxembourg
FranceIrelandUnited Kingdom
Australia
CanadaJapan
Switzerland
Germany
Korea
SwedenSpain
Italy
Denmark
NorwayBelgium
Finland
Austria
Netherlands
Taiwan
Liechtenstein
New ZealandPortugal
Czech Republic
Slovakia
GreeceMalta
Slovenia
29 cou ntrie s

Emerging
Economy

495.5

1999
AssetsShare

2008
AssetsRank

2015
AssetsShare

6,846.3

59.1%

9,602.9①

17,752.4

52.1%

1282%

159%

85%

661.1
656.1
95.2
375.2
371.2
269.8
502.8
82.5
237.3
167.2
83.3
207.6
475.7
27.6
15.1
65.5
10.3
56.3
94.5
31.2

5.7%
5.7%
0.8%
3.2%
3.2%
2.3%
4.3%
0.7%
2.0%
1.4%
0.7%
1.8%
4.1%
0.2%
0.1%
0.6%
0.1%
0.5%
0.8%
0.3%

②
③
④
⑤
⑥
⑧
⑨
⑩
⑫
⑬
⑭
⑮
⑯
⑲

0.1%
0.2%
0.0%

36.4

0.3%

-88%

9 8 .4 %

9.2%
5.4%
676%
4.8%
4.6% 1178%
4.5% 11149%
2.6% 3545%
2.4%
408%
1.3%
1.1% 1054%
1.0% 2243%
0.8%
0.8%
0.6% 2820%
0.3% 1002%
0.3%
0.3% 2205%
0.3%
0.2%
0.2%
940%
0.2%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
93 .4 %
1366%

69%
15%
126%
200%
81%
114%
41%
239%
58%
55%
147%
1%
-24%
79%
149%
-12%
81%
-27%
-17%
37%
119%
295%
59%
49%
60%
-65%

1 0 0 .0% 1 1,3 9 7.7

3,141.8
1,832.1
1,629.8
1,578.4
1,521.3
889.6
813.1
457.2
377.0
343.3
280.0
274.7
200.0
116.7
102.5
92.1
88.4
68.2
64.3
63.1
44.9
41.9
21.6
7.8
6.2
4.3
3.5
2.4
3 1 ,81 8 .6

375%
179%
1612%
321%
310%
230%
62%
454%
59%
105%
236%
32%
-58%
323%
579%
41%
756%
21%
-32%
103%

8.5
19.7
1.5

1,860.8
1,591.1
720.5
527.0
841.1
416.0
575.3
135.1
238.0
222.0
113.3
271.0
263.6
65.2
41.2
105.1
48.8
93.3
77.4
46.1
20.5
10.6
13.6
5.3
3.8
12.2
0.0
2.1
1 7,9 2 2 .5

179%

18%
7 8%

117.8
13.1
18.2
19.5
4.1
0.8
7.0
1.7

1.0%
0.1%
0.2%
0.2%
0.0%
0.0%
0.1%
0.0%

63.7%

84.6

10.9%

29.4
3.3
7.4
99.0

3.8%
0.4%
1.0%
12.7%

20.6
7.1

2.6%
0.9%

16.3
2.5

2.1%
0.3%

2.8

0.4%

9.1

1.2%

7 77 .6

China
Brazil
India
Union of South Africa

MexicoChile
PolandArgentina
Hungary
TurkeyTrinidad and Tobago

Romania
The Philippines
Pakistan
Costa Rica
Croatia
Bulgaria
17 cou ntrie s
World Total

0.1

07 77 .60
1 8 2.2
1 0 0 .0% 1 1,5 7 9.9

276.3

⑦

1,263.1

479.3
62.8
69.4
60.4
17.6
17.8
3.9
9.2
15.4
0.0
0.3
0.0%
1.3
2.0
1.1
0.0
0.2
1 .6%
1,0 1 7 .0
10 0 .0 % 1 8,9 3 9 .5

⑪
⑰
⑱
⑳

456.6
168.2
122.1
105.9
39.9
32.3
16.4
14.3
12.8
7.0
5.0
5.0
4.2
2.5
2.0
0.4
2 ,25 7 .8
3 4 ,07 6 .4

Rate of Increase
85→99 99→15 (08→15)

393%
10%
430%

3.7%
1.3%
0.5%
0.4%
0.3%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
6 .6 %
1 00 .0 % 1 38 9 %

357%
288%
1187%
569%
444%
875%
4137%
135%
727%

4198%

11 3 9 %
194%

-5%
168%
76%
75%
127%
82%
325%
55%
-17%
1445%
298%
110%
131%
95%
1 2 2%
8 0%

Sources: Compiled from IIFA data using figures excluding funds for institutional investors. 1985 data from Nihon Tōshi Shintaku Seido Kenkyūjo," Sekai Tōshi Shintaku Tōkei Yōran " [Handbook on Global Investment Fund Statistics], Fund Management, 2000 Special Edition.

(5) Diversification of distribution channels
Until around the mid-1980s, distribution channels of investment funds were confined to securities
companies(except for direct distributions by some investment fund companies), even in the UnitedStates that had the lead in financial liberalization, due to the restrictions of the Glass-Steagall Act.
However, from the late 1980s, banks began to distributefunds, and from around the 1990s,
independent financial advisors (IFAs) expanded their activity. In around 2000, fund supers24 that
24

“Fund super” is a system in which discount brokers have in hand funds from multiple investment fund11

utilize IT began to emerge, and the purchase of investment funds via the Internet
increased.Additionally, with the expansion of DC pensions from the 1980s, investment via DC plans
began to increase consistently.
In the European continent which adopts a universal banking system, banks serve as main
distributors of investment funds. Recently, however, it is said that distribution by IFAs haveincreased, and the use of the Internet has also become more widespread similar to the United States.
In the United Kingdom, IFAs occupy a leading position in the distribution of investment funds,
although more recently “fund platforms” (a system that allows for the purchase and redemption ofnumerous funds of multiplefund companies at low cost as well as administering investors’portfolios)
are utilized more frequently.
As described above, the increase in the distributors of investment funds and the multiplication ofpurchase methods including the Internet (in other words, investors had more means of accessing
investment funds) had the effect of promoting investment funds.
Comparison with Japan
In Japan, banks and other financial institutions began distribution ofinvestment funds in 1998,
which dramatically increased the linkages between investors and investment funds. At the end of
2015, investment fund assetsdistributed by registered financial institutions such as banks make up
31% of all publicly offered investment funds.

(6) Product lineup for diverseinvestment environment
The diversification of investment fund products increased dramatically by the introduction ofmoney market funds (MMFs) in the early 1970s. Both equity and bond (long-term bond) funds that
had existed from before had a weakness, which was that performance deteriorates when interest rateincreases. The addition of MMF, a product that follows suit of the short-term interest rate (if theinterest rate increases, the yield of funds also increases), contributed to creating aproduct lineup forvarious investment environments. Equityfunds, bond funds, and MMFs have beensupporting the
growth of investment funds.
In addition, MMF has served as a product with which investors unaccustomed to risks start
securities investment. It has also served as a product that temporarily receives customer funds during
equity price turbulence.
The changes in the global investment fund assets by types of product since the end of 1999, i.e.,the beginning of the 2000s, are as shown in Figure 5. During the collapse of the IT bubble in theearly 2000s (2000 to 2002), increases in bond funds and MMFs offset the decline in equityfunds.
During the global financial crisis in 2008, the assets of equityfunds decreased by as much as 48%
from the previous year. However, MMFs absorbed some of the safety-oriented money that flowed
companies and sell them at low cost (named after “supermarket” due to the diversity of the product lineup
and low prices).

12

out of equityfunds and kept the rate of decline of totalinvestment funds to 28%. During the period ofrecovery of securities market conditions through 2015, equity and bond funds have led the growth ininvestment funds. Furthermore, the increase in target date funds25 in the U.S. DC market and otherfactors have contributed to significant increases in balanced funds (classified as equityfunds inJapan) over the last several years.

Figure 5.Changes in Assetsof Worldwide Investment Funds by Types of Products(Unit: US$ Billion)

35000

30000

25000

OthersＭＭＦ
Bond Funds
Balanced Funds
Equity Funds

20000

15000

10000

5000

0

99

02

07

08

15

Source: Compiled from IIFA materials. Due to data constraints, 2015 includes private placement investment trusts.

Comparison with Japan
In Japan, medium-term government bond funds developed in 1980 and MMFs launched in 1992
played a certain role in increasing investment funds. However, because bond yields and short-term
interest rates also declined during the crash and slowdown of the equity market since the 1990s,
domestic bond funds and MMFs were unable to adequately receive the funds that flowed out of
equityfunds.
As is well known, Japan was forced to launchrelatively complex products, such as monthly
dividend funds (many of whichwere foreign bond funds that accompanied exchange rate risks), andfollowing the appreciation of the yen, currency selection-type funds in which foreign currencies ofhigh-interest countriesserved as a source of earnings. In 2016, all fund companies are moving to

25

Target date fund is a type of investment trust that incorporates the following theory of life cycle
investment (life cycle fund): “Own many risk assets and actively pursue gains while young, and as one
nears retirement, increase stable assets.” It is also called “target year fund.” Specifically, investment trust
companies prepare multiple funds according to the customers’ planned retirement period (e.g., aroundevery five years such as 2020, 2025, 2030, 2035, etc.), and customers purchase funds close to theirretirement period (target date). Each fund adopts a structure in which the weight of risk assets is high until
midway and the weight of stable assets gradually increases in the run-up to the target date.

13

redeem MMFs due to the impacts of the introduction of negative interest rates by the Bank of Japan.

3. Emerging Trends
Up to this point this paper has described the situation of the quantitative increases in global
investment funds and the factors that made this possible. This section discusses the qualitativechanges in investment funds in the last 30 years, which can be characterized by three major trends:(1) globalization; (2) rising cost consciousness, as reflected in the expansion of ETFs; and (3)advances in IT adoption.

(1) Globalization
In the last 30 years, investment fund industry has seen the globalization of both asset management
and asset acquisition (funddistribution).
(i) Asset management in various countries saw rapid increases in overseas investments.
For example, even in the United States which has a large securities market that provides favorable
returns, the share of internationalequity funds in all equity funds increased from 7.1% in 1985 to
25.8% in 2015. In terms of the net sales (sales minus redemption), the salesof internationalequity
funds has been bigger than that of domestic equity funds (or the net redemptionhas been smaller)
since 2005.
Additionally, in Europe where the ratio of overseas investments was originally high as their own
marketsarerelatively small, the ratio of foreign investments has increased even further. For example,
in Germany, the ratio of foreign securities investment to publicly offered securities fund assets
increased from 52.1% in 1992 to 67.9% in 2015 (only equities: 25.8% to 64.4%).26
In Japan, the ratio of foreign currency-denominated equities and bonds combined increased from
8.8% at the end of 1985 to 58.5% at the end of 2007. At the end of 2015, they stand at 34.5%.27
Needless to say, the increase in overseas investments by Japanese funds reflectsthe long-term
stagnation of domestic equitymarketsince the 1990s and the super-low yield of domestic bonds.
(ii) Cross-border distribution (acquisition of foreign investors’money) also increased.
To measure the progress of worldwide fund imports and exports, the assets of funds in the
domiciles of offshore funds that are all expected to be sold overseas serve as a reference.

26

Calculation based on Bundesbank statistics.
In Japan, fund of funds has been increasing in recent years. The foreign currency-denominatedsecurities held by yen-denominated master funds are not counted in the foreign currency-denominatedassets of the tabulations of JITA. Therefore, it is believed that the actual ratio of foreign
currency-denominated securities is higher than 34.5%. Incidentally, based on the product classificationsof JITA, equity investment funds at the end of 2015 consisted of 35.9% in funds invested primarily inoverseas assets and 23.8% in funds invested in both of domestic and overseas assets.
27

14

While the British territory of the Cayman Islands is among the well-known domiciles of offshore
funds,28the author could obtain assets statistics only for the IIFA members, Luxembourg and Ireland.
As shown in Figure 6., the ratio of the assets of funds eligible under the Undertakings for Collective
Investment in Transferable Securities (UCITS) directive29 established in these two countries to theworldwide investment fundassets has been on an increasing trend. The ratio exceeded 14% at the endof 2015, and the ratio to the fundassets excluding the United States30 whichessentially prohibits thesale of overseas funds (i.e., the investment fundassets of countries where foreign funds can be sold),reached 30%.

Figure 6.Percentage of Fund Assets Domiciled in Luxembourg and Ireland in the World
35%

Percentage of non‐US fund assets

30.5%

Percentage of Global fund assets

30%

27.4%
24.6%

25%

18.0%

20%
15%

12.3%

11.4%

10%

7.9%

5%

4.3%

5.4%

14.3%

14.6%

10

15

7.4%

0%

90

95

00

05

Source: Compiled from IIFA data

However, the funds of these two countries include, for example, funds that German managementcompanies established in Luxembourg which offers a high degree of freedom over fund design, andthen brought back and sold in Germany—in other words, funds intended for sale in their countries(called “round-trip funds”). The European Fund and Asset Management Association (EFAMA) statesthat round-trip funds accounted for one-fourth of the assets of funds of the aforementioned two
28

For example, according to Japan Securities Dealers Association statistics, a breakdown of the foreign
investment funds that are publicly offered in Japan by domicile shows 46.1% were domiciled in
Luxembourg and 41.5% were domiciled in the Cayman Islands as of the end of March 2015.
29
UCITS directive eligible funds are funds that have been created in accordance with the UCITS directive,
which provide a uniform criteria for promoting mutual sales of investment funds among EU member
states.
30
Pursuant to SEC. 7, Paragraph (d) of the Investment Company Act of 1940, in principle, the UnitedStates bans the public offering of foreign investment funds. The U.S. stance is that if foreign businesses
wish to sell their funds in the United States, then they can establish and sell funds in the United States inline with U.S. laws. According to the 2015 Investment Company Fact Bookpublished by the ICI, 8% of
the 867 investment trust managing companies in the United States at the end of 2014 were foreigncompanies.

15

countries at the end of 2014, and funds excluding round-trip funds represent funds truly intended foroverseas sales. Based on this understanding, the ratio of imported and exported funds in the world
based on the assets of investment funds in the aforementioned two countries were around 11%(14.6% ×3/4) most recently. As a share of the assets of investment funds of countries excluding theUnited States where overseas funds can be sold, it was around 23% (30.5% ×3/4).
EFAMA states that the funds of the two countries are sold to Europe as well as Canada, Japan,
Korea, New Zealand, Taiwan, and Hong Kong,31and it is found that UCITS directive eligible funds
have been sold to non-European countries (UCITS directive eligible funds are considered to offer
reassurance to investors outside of EU as they meet fund manager requirements, regulations on
scope of investment and credit risk, disclosure requirements, etc.).
As is well known, in recent years, drawing on the success of the UCITS scheme, there has been an
increasing movement to introduce systems to facilitatecross-border distributionof funds also in Asia((i) Asia Region Funds Passport; (ii) ASEAN fund passport; and (iii) mutual entry system in Chineseand Hong Kong funds).32(2) Rising cost consciousness, expansion of ETFs
With investors especially in the United States becoming more conscious of cost, this has translated
into a rapid expansion of ETFs. In the United States, the sale of non-ETF no-load funds has also
increased.
ETFs, which are said to trace their origin to TIPS35 developed by the Toronto Equity Exchange in
1990, expanded rapidly worldwide, particularly since the beginning of the 2000s, as shown in Figure
7. While there was just one time when the assets decreased from the previous year during the 2008
global financial crisis, the flow of funds maintained a surplus even during that period. According to areport by Deutsche Bank from which the author could take continuous statistics , the assets of global
ETFsat the end of 2015 reached US$2.88 trillion33 and increased by 72-fold since the end of 1999.
The share of global ETFs to totalinvestment funds in the world increased from 0.3% at the end of
1999 to 8.4% at the end of 2015.

31

EFAMA, FactBook 2015, p. 46 and p. 61.
For the Asia Region Funds Passport in which Japan also participates, a memorandum of cooperation
was signed among Australia, Japan, Korea, and New Zealand on April 28, 2016.
33
In IIFA’s statistics, the ETF assets at the end of 2015 was US$2.74 trillion.
32

16

Figure7. Changes in the Global ETF Assets and their Ratio to TotalInvestment
Funds
9%

3,500
ETF assets（US＄billion, lefthand scale）
3,000

8%

Ratio to total investment funds（%,righthand scale）
7%

2,500
6%
2,000

5%

1,500

4%
3%

1,000
2%
500

1%

0

0%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Sources: Compiled using data from Deutshe Bank’s "ETF Annual Review & Outlook," January 21, 2016
for 2003 and beyond、 and from BlackRock’s "ETF Landscape" for 2002 and earlier, as well as IIFA data
for all investment funds.

Factors behind the increase in ETFs are considered to include: 1) the low operation cost of funds34(accordingly, higher returns than traditional index funds can be expected); 2) as the product lineup
rapidly expanded from the 2000s, institutional investors and financial advisors (FAs) began toactively utilize ETFs to build up their portfolios; and 3) there are taxation advantages.35
In the United States, many non-ETF funds has also beenadopting no-load share classes whichhave no front-end load or CDSL, and have a 12b-1 fee of 0.25 percent or less. The share of no-load
funds to all long-term funds (non-MMF funds) has increased from 44% in 2001 to 66% in 2014.36
Furthermore, the average expense ratioshave been declining every year.
Underlying this is the fact that securities companies and FAs are shifting their business models
from commission-based to fee-based (rather than receiving a sales commission at the time of sellinga fund or receiving sales cost called “12b-1” every year from the fund, a separate fee for thecustomers’asset is received every year from the customer directly similar to a wrap account).
Therefore, some regard that there is not necessarily a significant decrease in the total costs ofcustomers.37
34

On the reasons why ETF costs are low, see: Kohji Sugita, “Hassoku kara 40 nen wo Mukaeru Indekkusu
Fando: Sono Kiseki to Kongo no Tenkai” [40th Year of the Index Fund: Its Path and Future], Japan
Securities Research Institute, <http://www.jsri.or.jp/publish/topics/pdf/1601_01.pdf>.
35
ETFs’ tax advantages: because redemption does not involve the sale of securities like conventional
funds (in kind redemption), there usually occursno capital gains within a fund (which means there is no
capital gain distribution to investors (accordingly, investors can defer capital gain taxation until they sellthe ETFs they hold).
36
From ICI materials.
37
For example, in a report prepared by Strategic Insight (a research and consulting company specializing

17Moreover, the recent rise in “Robo-advisors”seems to demonstrate the preference for low cost.

(3) Advances in IT adoption
The investment fundbusiness has rapidly incorporated the use of IT.
In the area of asset management, the industry has developed quants methods which make full useof computers. More recently, progress is being made in the development and use of indexes thatutilize “smart beta” (e.g., corporate profit-weighted index rather than market capitalization-weighted
index, dividend yield-weighted index and index weighted by “factors” such as value, low volatility
and momentum.).
In the area of funddistribution, “fund supers” were introduced in the 1990s in the United States. In
recent years, social media is utilized actively for sales promotions. It goes without saying that
advances in IT have enabled the emergence of Robo-advisor as a means of providingbasic financial
advice.
On the other hand, as is well known, addressing the negative consequences of IT adoption, i.e.,cyber security issues, also poses a major challenge for the investment fund business.38

4. Future Challenges
Global investment funds thus underwent a considerable transformation both quantitatively andqualitatively over the last 30 years. In the years to come, PricewaterhouseCoopers (PwC), forexample, in its “Asset Management 2020 A Brave New World” released in 2014, states that the asset
management industry will place itself at the center of the financial business, and estimates that theassets of global investment funds will increase from US$27 trillion in 2012 to US$41 trillion in2020.
In this context, what challenges will face investment fund industry?
The challenges will likely include: (1) the eternal theme of how investment fundswill contribute toinvestors; (2) how investment funds that have grown large will fulfill social responsibility; and (3)how the industry will be able to expand businesses.

in investment funds based in the United States) in 2011 at the request of EFAMA (“Fund Fees in Europe:
Analyzing Investment Management Fees, Distribution Fees, and Operating Expenses”), it is stated: “Theaverage European-domiciled retail equity mutual fund has a total expense ratio of 1.75% whereas a U.S.
retail equity mutual fund has a total expense ratio of 0.95%...the roughly 0.80% difference between
European TER for retail equity funds and U.S. equity funds can be significantly explained by placement
and categorization of ‘wrapper fees’ that are charged in addition to the TER.” (p. 11).
38
In 2015, a cyber security working group was established in the IIFA. ICI Global (internationalorganization of ICI in the United States) carries out its own unique fact-finding surveys on cyber security
measures in the investment fund industry and holds seminars around the world.

18

(1) How will investment funds contribute to investors?
This section deals with: (i) securinginvestment returns; (2) improving returns of investors; (3)providing added value other than investment gains; (4) fulfilling fiduciary duty; and (5) promoting
sales of cross-border funds.
(i) How to secure investment returns (inthe difficult investment environment)
As is well known, expected returns on equities and bonds have declined worldwide in recent years(sometimes referred to as “new normal,” in the sense that this is a new normal state different fromthe past).
Figure2. shows that equity prices have risen in the last 30 years. However, the situation up to 1999
and the situation in the 2000s and later are, in fact,entirely different. For example, U.S. equities roseby 596% in 14 years through 1999, whereas they rose by only 39% in the subsequent 16 years
through 2015. (Though not solely because of this, the rate of growth of the assets of global
investment funds slowed down from 1,389% in 1985 to 1999, to 194% in 1999 to 2015, as shown in
Figure4.)
Similarly, the yield on bonds has declined as shown in Figure2. For example, the yield on U.S.
ten-year government bonds decreased from an average of 8.29% through 1999, to an average of
3.67% in 2000 to 2015 and to below 2% more recently.
As expected returns on securities decease, how can investment funds offer favorable performanceexceeding that of bank deposits?
(A) Unchanging relative relationship of returns (deposits<bonds<equities)
What can be said first of all is that even if absolute returns on securities decline, the relative
relationship of risks and returns to bank deposits remain unchanged.
In other words, as investment in securities has risks, it remains unchanged that the average returnon bonds is higher than deposits, and that the average return on equities is even higher. Therefore, it
can be presumed that investment funds can maintain higher returns than deposits with respect oflong-term averages.
Accordingly, it is considered feasible to encourage investors to continue to invest infunds aslong-term investment instruments, upon providing sufficient explanation that these products haverisks.
(B) Contribution to increasing corporate value as institutional investors
Secondly, with regard to equities, a major component of investments by funds, fund companies’
activity as institutional investors such as rigorous selection of equities and execution of stewardshipincluding the exercise of voting rights will contribute to increase the value of corporate equities(return on equity in short), and thereby, to improve the performance of investment funds.
Index investing simply based on market capitalization may not adequately fulfill the capital
allocation function expected for securities markets, namely, to help procure capital for high-earningcompanies and urge low-earning companies to leave the market. Therefore, it is ideal that active
19

management funds in which fund managers and analysts select equities based on independentjudgment and analysis from a mid-to long-term perspective deliver high investment performance andgain the endorsement of investors.
(C) Use of Artificial Intelligence
The increasing use of IT in asset management of funds is as described in 3. (3). It seems that theuse of IT, however, has so far been centered on quant investment based on mass processing ofexisting data, and has not gone so far as utilizing creative artificial intelligence (AI).
The Financial Times recently reported that major UK asset management companies are jointly
looking into trading illiquid securities directly with each otherutilizing blockchain used in
bitcoin.39While this is an example of using AI in trading, AI can also be utilized on investment fronts,
such as asset allocation and equity selection, and thereby, contribute to improving investment
performance.
As regardsmoderninvestment theories, 60 years having passed since the unveiling of thediversified investment theory byHarry Max Markowitz in the 1950s and over 50 years since theemergence of the capital asset pricing model (CAPM) by William Sharpe. In this light, we may seethat the advent of technological innovations has been slow in the world of asset managementcompared to manufacturing or other industries. In the meantime, the investment environment haschanged dramatically—notably, the use of new investment tools including derivatives has spread,
while returns on securities have fallen as was discussed earlier and effectiveness of international
diversified investments have diminished.
The world of goods and services has seen a whirlwind of technological innovations including theuse of AI. Against this backdrop, it is time that the world of asset management (while “factor
investment”40 has been developed and utilized) also sees further breakthrough innovations.41(ii) Improving returns of investors
No matter how hard asset managers work to deliver good fund performance, unless the main
party—investors—experience successes, investment funds will not grow. Because investors have atendency to buy funds at high and sell at low, there is the problem of returns of investors being lessthan the returns of funds.
For example, even in the United States which is considered that peoples have relatively highinvestment expertise in the world, according to Morningstar’s analysis, U.S. investors’ investments
in long-term investment funds over a ten-year period until the end of 2015 had a weighted annual

39

Financial Times, February 8, 2016.
An investment method that focuses not on asset classes such as equities and bonds but on factors
including value, volatility, size, and momentum.
41
The January 21, 2016 Financial Times, in its Big Read column,published a front-page article with
Robert Wigglesworth’s signature titled, “Search for a super-algo.” The article quotes, “Eventually thetime will come that no human investment manager will be able to beat the computer” and “Artificial
intelligence can help you find patterns a human would never see. That can give you a huge edge.”
40

20

average return of 4.35%, falling below the average return of long-term funds of 4.88%.42 In addition,a recent Financial Times article reported about an analysis made by Goethe University in Germany,
whichfound that the return on investment of small investors’ investments in ETFs substantially
underperformed the market average(because they bought and sold ETFs frequently and the timing
was bad).43
The reason that return of investors are lower than the return of funds is because (i) the averagepurchase cost of investors is higher than the average price of funds or (ii) investors’ averageredemption price is lower than the average price of funds, or both.
To improve this situation, periodic investments on a regular basisshould be promoted further. If
investors continue to make fixed-amount investments, the average purchase cost of investors can bemade lower than the average price of funds due to the effects of dollar cost averaging (small
quantities are bought at high prices and large quantities are bought at low prices)44. In other words,(though the issue of redemption in (ii) remains) the return of investors could be made higher than the
return of funds.
Because DC is a type of compulsory periodic investment, its promotion will also contribute toincreasing the return of investors. In fact, the Morningstar article referenced above indicated that
return of investors on target date funds that often involve continuous purchases through 401(k) plans
had a 5.16%ten-year average return, exceeding the return of funds of 4.42%.
(iii) Providing additional value other than returns on investment
Investment performance is not the sole added value that investment funds as a financial productcan provide to investors. For instance, convenience in investmentis also important, and many
countries have introduced various investment plans from several decades ago, including
arrangements for automatically reinvesting dividends as well as a periodic investment system inwhich investors can start with small amount investments.
An area that the asset management industry should enhance in the coming years is post-retirement
asset management and decumulation services. While asset formation for retirement has been an
important theme for many investors, it is considered that as baby boomers retire worldwide andpeople live longer, the themeof how to efficiently conduct post-retirement asset management anddecumulation will become an important issue for many investors.

42“Encouraging Signs for Target-Date Funds,” Morningstar,<http://news.morningstar.com/articlenet/article.aspx?id=748653>.
43
Financial Times, February 1, 2016,<http://www.ft.com/intl/cms/s/2/0c4278aa-c366-11e5-808f-8231cd71622e.html#axzz46F6hXHyR>.
Original source: Utpal Bhattacharya, Benjamin Loos, Steffen Meyer Andreas Hackethal and Simon
Kaesler, “The Dark Side of ETFs and Index Funds,”March 2013.
44Using the Nikkei 225 stock index as an example, the average of the index at the end of year in the 30
years to 2015 was 16,792 yen, whereas the average purchase cost om making fixed amount investment iscalculated to be 14,682 yen.

21

However, asset decumulation is considerably harder than asset formation. Because thecircumstances vary significantly by individual, including the size of assets held at retirement,
expected income after retirement, risk tolerance, and whether or not they leave inheritance to theirchildren, it is difficult to identify a versatile decumulation formula. Above all, no one knows how
longhe or she will be alive.
Furthermore, as was noted earlier, there is the issue that while asset formation can be conductedefficiently through fixed-amount accumulation (dollar cost averaging), fixed-amount decumulationof
assets whose price fluctuate isinefficient (because small quantities are sold at high prices and large
quantities are sold at low prices).
Providing solutions to these issues will be a major theme for the asset management industry.
(iv)Performing fiduciary duty to investors
In recent years, the fiduciary duty ofasset management companiesto investors has become
increasinglyemphasized. While the duty of loyalty of asset management companies has beenlegallyprovided for in countries such as Japan and the United States, more recently the United States andEurope are strengthening measures to avoid a conflict of interest between distributors and investors.
Specifically, these measures include: (A) Retail Distribution Review (RDR) in the United
Kingdom (implemented since the end of 2012); (B) Markets in Financial Instruments Directive II(MiFID (II) in the European Union (EU) (to be implementedin January 2018); and (C) the U.S.
Department of Labor’s introduction of rules applying fiduciary duty also to broker-dealers for
retirement investment advice (to be fully implemented in January 2018).
All these measures are designed to prevent a conflict of interest particularlyin the context ofinvestment advisory or solicitation activities. The measures prohibit the receipt of commissions fromproduct issuers by advisors including non-independent advisors in (A) and by independent advisorsin (B). (C) imposes not only the existing rule of suitability on distributors, but also fiduciary
responsibility including duty of loyalty.
The implementation of these measures is likely to promote a shift to the distribution of low costproducts. In part of Europe, as the product lineup of distributors will be increasingly constrained,some view that open architecture45 that had been undertaken since around 2000 will recede.
Typical examples of fiduciary duty involve the relations of physician and patient or lawyer andclient. Considering that both physicians and lawyers are high-income earners, the level of fees would
not be the crux of fiduciary duty. In this vein, it seems that fiduciary duty does not deny investment
business practitioners from earning a legitimate remuneration for their professional skills andservices.
Of course,fulfilling fiduciary duty and earning incomes of investment-related businesses should
not be incompatible, particularly where asset managers increasethe total earnings pie (the investment
45

In investment fund business, “open architecture” refers to a business style in which sellers and asset
managers are connected openly beyond their capital affiliated relations, etc.

22

return before deduction of costs) (discussed in 4. (1) (i)), and distributorsincrease the value of theiradvice and gain trust from customers. A report (published December 2014) regarding a study
conducted by the U.K. Financial Conduct Authority (FCA) on RDR two years after its introduction
has in fact found that“When choosing an adviser consumers value quality indicators such as trust
and reputation over cost.”46(v) Promoting cross-borderdistribution of investment funds and giving investors access to
wide-ranging products
As stated in 3. (1) (ii),cross-border distribution of investment funds are becoming morewidespread. However, this movement has been confined toregional blocs, namely, the EUregion andcertain countries in Asia.
The most ideal situation for investors will be that every investor in the world can freely purchase
every fund in the world from every distributer in the world.This would decrease the number of funds
in the world, which currently stands at as many as 85,000 funds,47 and is expected to lead to cost
reduction.
To move in this direction, progress should be made towards importing and exporting funds on a
global basis, not only from within the EU and Asian blocs, and towards liberalizing the entry ofbusinesses.48(2) How investment fundswill fulfill social responsibility?
This section deals with: (i) contribution of improving the quality of the securities market; (ii)development of ESG investment; and (iii) consideration to the stability of the global financial
system.
(i) Contribution to improving the quality of the securities market
In 4. (1) (i) (B), it was stated that institutional investors should contribute to improving thecorporate value of listed companies from the perspective of increasing the performance ofinvestment funds.
Needless to say, however, improving the corporate value of listed companies not only benefits
investment funds, it also contributes to qualitatively improving the efficiencyof securities marketin
allocating capital. That is, it also translates into fulfilling social responsibility.
To this end, as mentioned earlier, it is ideal that active management offers higher investment
outcomes and expands, and that both active and passive management proactively execute the46

Europe Economics ”Retail Distribution Review Post Implementation Review 16 December 2014”
p.37.
47
According to the IIFA’s tabulation, the number of publicly offered funds at the end of 2015 was 85,773(100,494 including private placement funds).
48
From the above perspective, it is significant that the same ETFs are cross-listed on many exchanges inrespect to providing the same products to a wide range of people across national borders. ETFs could playa large role in standardizing investment fund products around the world.

23

stewardship code, including the exercise of voting rights.
(ii) Development of ESG investment
Socially responsible investment (SRI) that gained full traction in around the 1980s has also beencalled ESG (environment, social, and governance) investment in recent years and is considered partof the responsibilities to be fulfilled by institutional investors.
Today, ESG screening is no longer utilized only by specialized funds,49 and is included in thescreening for selecting equities by all funds.
(iii)Paying more attention to linkto the stability of the global financial system
While protection of investors had been the main objective of the regulations on investment funds,
in recent years, especially since the global financial crisis in 2008, regulations are increasingly being
adopted from the perspective of maintaining the financial system.
MMF has become subject to stricter regulations of the Financial Stability Board (FSB) in thecontext of the G20 initiatives. In the United States which has a large MMF market, Securities
Exchange Commissionrules have already been modified.
With regard to longer-term funds, for example, the IMF has expressed concerns over the impacts
on the securities market if there wasa large amount of redemption of funds invested in low liquidity
assets (e.g., bonds of emerging economies).50 There has also been a talk about the impacts of rapidly
growing ETFs on price formation in the securities market. Against this backdrop, in 2015, U.S.SEC
proposed fund liquidity regulations as well as derivative regulations for regulating leverages.
Such regulatory strengthening is a reflection of how investment funds have grown in size andcome to acquire an important standing at the market. In this regard, it is a matter of course that
actions are taken to enable investment funds and the market to mutually co-exist and co-prosper.
On the other hand, how to preserve “innovation capacity in an environment of fierce regulations”(statement released after the IIFA 28th Annual Conference in 2012) is another challenge for theindustry.

(3) How will investment fund industrybe able to expand businesses?
This section will cover: (i) expectations towards emerging economy markets; (ii) use of FinTech;and (iii) product line-up.
(i) Emerging economy markets have significant potential growth in fund business
49

The smaller amount of Japanese SRI (or ESG) funds relative to the UnitedStates and Europe may also
have a lot to do with the differences in their screening methods. Whereas the United States and Europe
adopt the negative screening method which only eliminatesinvestment candidates that meet the negative
criteria (the rest are considered suitable for investment), suitable investments are limited in Japan whichuses the positive screening method of selecting only companies that meet the positive criteria as suitablefor investment.
50
IMF, “Financial Stability Report,” Chapter 3 The Asset Management Industry and Financial Stability,
April 2015.

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As stated in the opening of this paper, global investment funds increased by 28-fold in the last 30
years. However, as was shown in Figure 4. and noted in 4. (1) (i), the rate of growth has slowed
down amid stagnant equity prices since the beginning of the 2000s. In particular, the United Statesthat accounts for half of the global investment fundassets is showing signs of a maturing investment
fund market.
In the future, emerging economies are expected to see long-term growths in investment funds.
Figure 8. shows the relationship between per capita GDP and the ratio of the investment fundassetsto GDP in 16 of the G20 countries for which investment fund assets statistics are available.
The figure illustrates that if per capita GDP increases, the ratio of the investment fund assetsto GDP
also increases.
Accordingly, it is anticipated that countries with high rates of economic growth will see rapid
increases in fund assets due to synergistic effects between the growth of the fund assets
accompanying GDP growth and increases in the ratio of the fund assets to GDP.
Let us take China as an example. PwC’s “The World in 2050” released in January 2011 estimatedthat in 2050, China will have a GDP of US$59.5 trillion and a per capita GDP of over US$40,000(based on 2009 standard purchasing power parity). If China’s ratio of fund assets to GDP in 2050 is7%, same as now, investment funds would have assets of around US$4 trillion. However, as noted
above, the ratio of the fund assets to GDP is expected to increase with the growth of per capita GDP.
If we assume from Figure 8. that they increase to the median between the current UK and Japaneselevels (per capita GDP: US$40,900; ratio of fund assets to GDP: 28%), the size of Chinese fundsis
calculated at US$16.7 trillion.
In emerging economies where investment funds are not yet widespread, fundsare expected to
grow by a factor several times greater than the rate of economic growth.

25

Figure 8. Relationship between Per Capita GDP and
Ratio of Investment FundAssets to GDP in G20 Countries (As of
2014)
Ratio of Dometic Investment Funds Assets to GDP
120%
Australia
100%
United States
80%
France60%

CanadaBrazilSouth Africa

UK

40%
Korea
Japan

20%
India
0%
0

MexicoItaly

China
Turkey Argentina
10000

20000

30000

40000

Germany

50000

60000
70000
Per Capita GDP (US$)

Note: As Germany and Italy often establish funds outside of their countries, such as in Luxembourg, and bring theminto their countries, domestic fund assets are on the small side.
Sources: Investment fund assets data from IIFA; GDP and population ｄａｔａ fom the IMF’s “World Economic Outlook
Database October 2015.”(ii) Use ofFinTech
3. (3) stated that the world of investment funds has already been seeing advances in IT. In addition,
the use of AI for improving management performance was touched upon in 4. (1) (i) (C).
It is a matter of course that the fund industry should make full use of FinTechfor distributionandproduct development too.It is well known that since 2013, the Alibaba group and other organizationsin China have already collected vast amounts of funding for MMF through the Internet.51
It is also forecasted that advances in FinTech will recreate the map of the fund industry. The
aforementioned PwC report, “Asset Management 2020” predicts that IT companies, such as Google,
Facebook, and Amazon, will enter the fund industry.
In the past, fund companies were comprised of independent companies that were originally asset
management companies, as well as companies with parent companies in the broad financial industry,including banks and insurance companies. In the future, competitors of an entirely different nature
may enter the industry, and to compete with these companies, existing companies may be forced tofundamentally re-evaluate the added values they are providing to investors.

51

The assets of Chinese MMF at the end of 2015 reached US$684.4 billion.

26

(iii)Are MMFsdisappearing in Japan and elsewhere?Is it a good trend?
As super-low interest rates persist worldwide, MMFs have remained stagnant (the ratio of MMFs
the entire global investment fund assets decreased from 30.6% at the end of 2008 to 13.6% at the endof 2015). In Japan, the MMFs of all fund companies are being redeemed under negative interest
rates.
Nevertheless, as stated in 2.(6), MMFs that were developed in the 1970s strengthened the productlineup of investment funds as products that can withstand interest rate hikes, and together withequity and bond investment funds, supported the growth of global investment funds over several
decades.
MMFs stillexist in the United States and Europe despite the adverse environment. In Japan, while
it is a matter of course to have selection and concentration at the level of individual companies, it isideal if the industry as a whole has a product lineup for diverse investment environment. Once theclimate has changed, MMFs should be restored to enhance the product lineup.

Conclusion
This paper discussed the changes in global investment funds and their future challenges.
While the last 30 years was covered in this paper, global investment funds in fact have a history
spanning at least a century and a half.52 Up through the present, they have overcome numerous trials
including the Baring Crisis of 1890, the Great Depression of 1929, and the global financial crisis of
2008.
The 22nd IIFA Annual Conference was held in Montreal, Canada in the midst of the crisis
immediately following the collapse of Lehman Brothers in 2008. As stated in its final communiqué,“the investment fund industry is no strangers to crisis, given its long history.”It is expected that, justas in the past, investment funds will continue to develop as an indispensable tool forworldwideinvestors to save for retirement and participate in the global securities markets.

52

There are two leading theories regarding the beginning of global investment funds: a theory that theForeign and Colonial Government Trust established in Britain in 1868 was the world’s first investment
fund; and a theory that the Eendragt Maakt Magt established in the Netherlands in 1774 was the firstinvestment fund. In recent years, U.S.ICI has been publishing in its Investment Company Fact Book’s“Significant Events in Fund History” that the latter is the world’s first investment fund.

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