Japan’s fund wrap service boosts structured funds activity

Japan’s fund wrap service is gaining increasing traction in Japan’s market and has opened up new opportunities for structured funds as one of the investable instruments under the scheme.

According to the report released by Japan Investment Advisers Association, both the number of subscriptions and outstanding volume in fund wrap accounts hit a new record of 129,492 and JPY1.6bn ($13.5mn), respectively, at the end of June 2014, which is 2.5 and 2.1 times the figure recorded in March 2013 respectively.

“Undeniably part of the capital may flow into structured funds, but it would only be restricted to the fund wrap service provider with the corresponding product line-up,” said Shoko Shinoda, fund analyst at Rakuten Securities. “In that case, hedge fund or fund with CPPI payoffs could benefit from the trend. However, there is higher tendency for service providers to allocate assets in foreign equities and simple structures.”

Shinoda also said that when it comes to structured funds, the main chunk of the inflows continues to go to open investment trusts, although there’s an increasing amount of funds investing in hybrid securities.

According to Shinoda, together with the implementation of Basel III, new issuance of hybrid securities are more preferable from an issuer perspective as having a higher capital-to-asset ratio will help to comply with the new standard.

“The Bank of Tokyo Mitsubishi UFJ and local banks are putting emphasis in selling funds investing in hybrid securities in the US and Europe, as investors would tend to avoid countries such as China or Russia with political or economic instability,” he said. “Also, since more risk will be absorbed by the investors in the event of a credit default, the coupon offered will be higher.”

Shinoda expects structured products wrapped as funds to use mainly the knock out payoff structure as “call overwriting strategies have relatively higher risk”.

Fund wrap is an asset management service that caters to the investment goal of individual investors, who are given access to multiple investment trusts and advice provided by eligible financial institutions.

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Japan’s fund wrap service boosts structured funds activity