Who Should Support the “Import” of ETF Strategies into Japan?

How Taiwan–Japan ETF collaboration highlights the importance of separating investment strategy, local product structuring, governance, and investor communication

ETFs Play a Somewhat Different Role in Taiwan and Japan

During my recent trip to Taiwan, I was once again struck by the energy of the local ETF market. At the same time, seeing how actively Japanese and Taiwanese asset managers are engaging with one another made me think about what would be needed to turn more of that enthusiasm into actual cross-border business.

In Taiwan, ETFs have become deeply embedded in retail investors’ asset-building activities and have also developed into an important growth business for asset managers. There are several reasons for this, including market conditions and the popularity of high-dividend products. What particularly stood out to me in conversations there, however, was how clearly retail investors seem to understand the benefits of choosing ETFs, including their cost differences from conventional publicly offered mutual funds. Information about these products also circulates widely through YouTube, social media, and financial influencers. The economics of the products and the channels through which investors learn about them appear to reinforce each other relatively well.

Japan is somewhat different. There are many low-cost ETFs, but Japan has also developed an extensive market for low-cost, unlisted index mutual funds, such as the eMAXIS Slim series. For retail investors using passive strategies, the cost advantage of switching specifically to an ETF is therefore not always clear-cut. When regular investment plans and automatic reinvestment are taken into account, choosing an unlisted investment trust can be entirely rational.

If Japan’s ETF market is to expand further, the question may therefore be less about price competition among passive products and more about what new investment value can be delivered through the ETF format, including through active strategies and strategies that use derivatives. The Tokyo Stock Exchange has already been expanding the range of listed active ETFs and product structures. But establishing the market framework does not automatically create a market. Investment strategy, product implementation, investor awareness and understanding, and ultimately the economics of the business all have to connect.

Turning Cross-Border Interest into Viable Business

Many asset managers from both Japan and Taiwan participated in the Taiwan–Japan ETF Forum, and I came away with the impression that there is strong interest on both sides in overseas markets. Concrete examples of cross-border ETFs have already emerged between Japan and Taiwan, representing important progress in connecting the two markets.

At the same time, looking at the event from the somewhat unusual position of a platform solutions provider that does not have proprietary investment strategies of its own, I also saw a structural challenge in expanding this kind of collaboration from isolated projects into a broader business model.

What I sensed from many of the conversations was that Japanese asset managers want to “export” their own investment strategies to Taiwan, while Taiwanese asset managers have an equally strong desire to “export” their strategies to Japan. But the economics change significantly once an asset manager is asked to become the party that “imports” another firm’s strategy into its home market.

If an asset manager adopts another firm’s strategy as one of its own products, it may have to accept the risk of cannibalizing its existing products, conduct due diligence on the external manager, assume product-structuring and governance responsibilities, bear marketing costs, and absorb the business risk that the product may fail to gather sufficient assets. This is not a question of whether the firms are willing to collaborate. It is a natural consequence of each asset manager being accountable for its own P&L and for the products it offers to clients.

In Japan in particular, many of the asset managers operating ETF businesses are large firms with the internal capability to develop a wide range of products themselves. For such a firm to adopt an overseas manager’s strategy, there generally needs to be a compelling reason—for example, that the strategy cannot readily be replicated internally or that there is clear demand from Japanese investors. Even in an asset class such as Taiwanese equities, where a local manager may have an obvious comparative advantage, whether a resulting product can gather sufficient assets in Japan remains a separate business question.

Reciprocal product adoption is, of course, one possible form of collaboration. But even then, the corporate relationship needs to be carefully separated from the product decision: is the product genuinely needed by investors in the local market?

Seen from this perspective, the bottleneck in cross-border asset management may not be a shortage of attractive investment strategies. The bottleneck may instead lie in how the business is structured: who converts an overseas investment strategy into a domestic product, and whose P&L bears the fixed costs and business risks of doing so.

From Company-to-Company Partnerships to Function-to-Function Collaboration

If that is the case, the next step does not necessarily have to be connecting individual Japanese and Taiwanese asset managers on a one-to-one basis. Another possibility is to separate functions that have traditionally been vertically integrated within a single asset management company and allocate them to parties with comparative advantages in each area. That could make some forms of collaboration economically viable that previously were not.

For example, a Taiwanese asset manager might provide the investment strategy and product concept. The Taiwan, Hong Kong, or other Asian office of a Japanese asset manager could use its local network to handle deal sourcing, initial commercial assessment, partner due diligence, and ongoing relationship management. A neutral Japan-side ManCo-style platform could then handle the local product structuring, regulatory and compliance framework, product governance, and fund operations required for a Japan-domiciled ETF or other mutual fund. Specialist marketing functions could also be added where appropriate to support communication with Japanese investors while respecting the overseas asset manager’s brand strategy.

Under such a division of roles, a Japanese asset manager would not necessarily have to adopt an overseas manager’s strategy as its own product—and assume all of the fixed launch costs and asset-gathering risk—simply to deepen its relationship with that manager. Opportunities brought to an overseas office that previously could not be commercialized because of product conflicts or economics could instead be connected to a neutral local product platform. This could create another way to turn the overseas office’s strengths in sourcing, due diligence, and relationship management into actual business.

For an overseas asset manager, the same model may create a route to offer its investment strategy to Japanese investors without first having to build from scratch the local organization and systems required to launch and manage Japan-domiciled funds.

The value of a neutral platform, in my view, is not simply that certain functions can be outsourced. If the platform does not operate competing proprietary investment products and its business is the provision of platform functions themselves, decisions about whether to implement an external manager’s strategy can be made with less direct connection to the platform provider’s own product sales strategy or concerns about cannibalization.

In that sense, a white-label platform can do more than reduce the fixed cost of common functions. It can also structurally separate the local product implementation function from commercial interests that have traditionally been combined within a single asset management company.

Separating functions, however, is entirely different from dispersing responsibility. Responsibility for the soundness of the product structure, oversight of investment management, disclosure, and investor protection must remain clearly assigned to the Japan-based entity responsible for product implementation and governance. The purpose of a horizontally specialized model is not to dilute responsibility. It is to place functions, economic incentives, and responsibilities where they can most rationally be performed and borne.

JAMP Fund Management’s white-label services for ETFs and other Japan-domiciled investment products are one implementation of this type of model. During the Forum, we received a number of questions about the model from representatives of the Taiwan Stock Exchange. Neutral white-label platforms of this kind do not yet appear to be a common model in Taiwan. Based on the discussions, however, I felt there was meaningful interest in the underlying idea of separating investment strategy from the local product implementation function.

Beyond Cross-Listing: Building Market Connectivity

Even if an overseas investment strategy can be converted into a Japan-domiciled product, the cross-border business is not complete. Overseas asset managers typically do not have the same investor touchpoints or marketing organizations in Japan that domestic firms have.

As I wrote in last week’s JAMP Perspective No. 348, making a product available for purchase is not the same as making investors aware of it, helping them understand it, and getting it into their consideration set. The day after the Forum, I also discussed Japan market entry with the CEO of a major Taiwanese asset manager. The discussion showed strong interest not only in how to structure a product, but also in how to build investor communication in Japan.

At the Forum, the Taiwan Stock Exchange also raised the broader idea of developing the product cross-listings already achieved between the two markets into deeper “market connectivity.” When thinking about such connectivity, I believe it is important to look beyond the number of ETFs cross-listed between the two markets. Another measure is how much friction can be removed between the place where a strong investment strategy is created and the investors who may need it.

If product structuring, regulatory compliance, governance, marketing, and investor communication channels all have to be maintained within a single company , cross-border expansion becomes a heavy undertaking that may be feasible mainly for the largest asset managers. But if parties with comparative advantages in different functions can work together, investment strategies that previously could not be commercialized because the economics did not work may have a greater opportunity to cross borders.

Rather than forcing companies or products into reciprocal arrangements, perhaps the next form of connectivity is to connect functions: investment strategy, deal sourcing, local product implementation, governance, and investor communication.

Internationalization of the asset management market could then be viewed not only in terms of how many products cross national borders, but also in terms of how little friction stands between an investment strategy and the investors for whom it may be relevant . After discussions with a wide range of market participants at the Taiwan–Japan ETF Forum, I came away thinking that this may be one of the next opportunities for collaboration between the Taiwanese and Japanese ETF markets.

Author: Keiichi Ohara, President & CEO, JAMP Corporation
About This Article
This article is an adapted English edition of JAMP Perspective No. 349, originally written in Japanese by Keiichi Ohara and distributed on September 9. It has been edited and supplemented where necessary to make the discussion and its Japan-specific context clearer to readers outside Japan. It is therefore not a direct translation of the original Japanese newsletter.

This article is provided for informational purposes only and does not constitute investment advice or a recommendation regarding any financial product.