Dividend payments tip Japan funds into the red

The Japanese funds industry is going to pay about ¥4 trillion ($50 billion) this fiscal year (ending March) in the form of dividend payments, the same amount it paid for FY2011 – obligations that mean net cash outflows for some providers.

Sadayuki Horie, managing director at Nomura Research Institute in Tokyo, says the top-line outlook for industry inflows looks rosy.

NRI’s research suggests the next five years should see the investment trust industry and other risk-bearing products rake in ¥4 to ¥6 trillion annually.

The bulk of that flow will come from the maturation of Baby Boomer-held 10-year government bonds, time deposits and postal savings insurance, and from the payout of lump-sum retirement benefits.

But NRI estimates over the next five years, fund houses will have to also pay out ¥3 trillion per annum in the form of dividends.

Horie says FY2011 saw the industry suffer net cash outflows because of poor sales.

Performance of many dividend-paying funds has also been poor. Since the advent of the ‘double-decker’ fund in 2009 (which seeks returns from both investing in overseas fixed income and a currency such as the Brazilian real), many emerging market currencies have depreciated, damaging funds’ net asset values.

As a result, many fund management companies this year have been forced to reduce their monthly dividends on products launched in 2009-2010, including the likes of Nomura Asset Management, which pioneered double-deckers, as well as DaiwaSB Investments and Nikko Asset Management.

NRI data shows the average dividend yield in 2011 was 14%, up from around 7-8% in 2008. Horie expects those yields to trace back over the coming year or so.

For a look at the next trend in Japan’s funds industry, see the forthcoming December edition of AsianInvestor magazine.