The Independent

Atsuto Sawakami thinks the Japanese are finally ready to put their money into something other than savings. The growth of his self-named stock fund suggests he's on to something.

Phtograph by Andrew Pothecary

ATSUTO SAWAKAMI GREETS a visitor to his no-frills office in Tokyo's Nibancho by handing over what he happily describes as an "instant name card," freshly printed out from his PC for the occasion. "I'm stingy," he boasts. Proposing that he and his visitor doff their jackets for the duration of the interview, Sawakami explains that thrift is only appropriate in view of his self-appointed mission: trying to persuade ordinary Japanese to shift their money out of banks and postal savings accounts and insurance policies and entrust them for the long term to his low-fee, no-load -- and, one might add, no-name -- stock fund.

Relying on word of mouth and some impressive financial results, he has enjoyed exponential growth in his pool of subscribers. The Sawakami Fund started in August 1999 with just 487 subscribers. By August of 2000, new investors were coming in at a rate of 500 a month. In October, investors were fleeing in droves from other investment trusts, appalled at their hefty declines in net asset value -- but that month, applicants to invest with Sawakami exceeded 1,000; in December, 1,400; in March, 3,000.

Those numbers are still minute in the overall scheme of things, of course. But questionnaires that Sawakami has his new clients answer tell a more compelling story. Of all the 17,000 people who had invested in the Sawakami investment trust by May, fully 62 percent confessed to having no previous investment experience whatsoever; another 20 percent were experienced only in the sense that they had dabbled in money management funds (MMFs). It's pretty clear that Sawakami has at least begun to make an impression on those Japanese who in the past never trusted anyone in the securities industry to look after their money. "This is an entirely untapped business area," he says.

How big is the potential market? Enormous. Of ¥1,400 trillion in individual financial assets in Japan, only 6.5 percent is in stocks directly, about 4 percent in bond purchases, and 2.4 percent in toushin (investment trusts, or mutual funds as Americans call them) of whatever description, according to Bank of Japan figures. Households have parked the great bulk of their financial assets in savings accounts (54 percent) and life insurance (18 percent) -- but they aren't particularly happy about it. "People say the Japanese do not want risk, but it's not a true observation," says Sawakami. "They just don't know about investing. They are fed up with poor interest rates and are ready to try something else."

If Sawakami proves over the next few years to be right about that, then others who share his approach will inevitably pile on, and Japan will see a drastic transformation in the saving habits of its households -- and thus in the stock market, which until now has remained largely in the clutches of cross-holding corporations. The prospect that from such small beginnings will come the development of a wide-open, American-style market in Japan might appear to be a big story -- indeed, a huge story. The fact is, though, that Sawakami's numbers have yet to impress the big Japanese newspapers sufficiently to inspire writeups.

Never mind. Some foreign fund managers know, and are hugely impressed. "He's the future of Japan," is the grand assessment offered by Edwin C. Merner, president of Atlantis Investment Research Corporation. Himself a veteran of three decades of involvement with Japanese stocks, Merner says Sawakami is a rarity among Japanese in the industry in that his company is independent, not connected to a brokerage house. More significantly, "He's interested only in making money for his clients, not churning the accounts. Many houses just want commissions; he does what he says. He's accepted now, but when he started he was considered un-Japanese."

Sawakami knew for years what he wanted to do, but the actual launch of his business took a while. Until 1996, he says, he was trying futilely to persuade the Geneva home office of Pictet & Co. -- Switzerland's largest private bank, whose Japan operations he headed -- to expand into the investment trust business and sell directly to ordinary households. Accustomed to a low-manpower operation serving institutional and high-wealth private clients, the Swiss were loathe to let him venture into a labor-intensive, mass-market retail business. Assuming that most Japanese simply didn't know about investing, Sawakami believed that many would give it a try "if we can show a satisfactory model of long-term investing." He left Pictet, made his preparations, and in August 1999 started Sawakami Fund.

It helped his pitch that, after a slow start, Sawakami Fund has been drastically outperforming the market. By May of this year, anyone poring over the net asset value (NAV) tables in the Nihon Keizai Shimbun could learn that the fund's share price was around ¥11,700 -- up by more than 15 percent since its inception 20 months before. Meanwhile the Nikkei and Topix averages were both down by around 20 percent for the same period. Nomura Asset Management's high-profile Japanese Stock Strategic Fund, which had attracted ¥1 trillion when it started in February 2000, was likewise way down -- its holdings no longer worth anything near a trillion. Thanks to the NAV listings in Nikkei, Sawakami notes, "This is transparent. Everyone can look at it. If they are sufficiently confident in us, they can come to us."

And they have, although "to tell the truth, we have done nothing very different in the way of investment," Sawakami says. "We are just bottom-fishers who do research, find companies selling at ridiculously low prices, buy them, and hold them until the economy recovers. The way of investment is quite conservative. We don't chase market rallies or high fliers. We are just accumulating very good stocks that are undervalued." But he also insists on buying at a discount even from the low price the market has attached to a stock; to make doubly sure it gets bargains, the fund issues no buy orders at the current price. His investors are catching on to the buy-on-bad-news strategy, becoming "more sophisticated. When they noticed we were buying at the time of the market crash, they put in more money."

Besides insisting on undervalued stocks, Sawakami prefers companies that he believes "will contribute in the future to the Japanese economy and Japanese society." He likes some chemical stocks now because the industry is restructuring through mergers; with a smaller number of players, there will be more scope for profits, he thinks.

Stocks that Sawakami has avoided include banks, brokerages, and consumer finance companies. He wrinkles his nose at the mention of Softbank and Hikari Tsushin, saying he stayed away completely because he didn't want "to participate in such a money game." Indeed, the IT industry in general had been flying too high for his tastes until last year. "Then starting from May last year, the big IT rally came down, so we started to pick up only those IT companies which could fit in with our philosophy." In the trough, he bought the likes of Fujitsu and electronic component makers Rohm and Murata. He stays away from shares listed on the new Mothers and Nasdaq Japan markets -- mention of which likewise causes his nose to wrinkle -- preferring to wait for the winners among them to reach the main board. "At the moment, big companies are also at a discount, and I prefer big companies," he says. His idea is to "show the public we are not gambling. We are orthodox investors, not making a game but just a steady climb."

By learning about the fund on their own and then phoning Sawakami Toushin K.K. to ask the company to send its application materials, prospective investors avoid the substantial sales commissions or "loads" added to the initial costs of most competing investment trusts. And they effectively hire Sawakami's staff of money managers at an annual fee of 1 percent of net asset value -- versus, typically, 1.9 to 3 percent for other funds. ("This is why I'm so stingy," Sawakami says.) But before plopping down their money, the would-be investors have to get over the initial hurdle of figuring out how to contact the low-visibility company. They usually end up looking it up in the Yellow Pages, because the firm doesn't advertise in other media. "Some people complain to us that it took them a long time to find our telephone number," Sawakami says.

Sawakami claims that his company is the first in Japan to succeed at marketing an investment trust exclusively via direct sales to the public -- using neither commissioned salespersons of its own nor institutional sales agents such as banks and brokerages. Some major brokerage companies tried the direct model as one of a number of sales channels but didn't get far with it, Sawakami says. Their problem, he believes, lay in trying to use a single all-purpose fund to meet the needs of all classes of investors, big and small, individual and institutional.

WHERE THE JAPANESE PUT THEIR MONEY The Japanese hold about ¥1,400 trillion in individual financial assets (second only to the US). Currently only 2.4 percent of that goes into investment trusts. Sawakami predicts that in a decade the percentage will rise to 10 percent -- a huge opportunity, as he sees it. Source: Bank of Japan, figures current as of March 2001

His fund appeals to just one category of investors: those who are in for the long term and have the patience to sit on their investments through the inevitable ups and downs in the market. "If you'd like to have dividends at the end of the fiscal year next March, go somewhere else," he says bluntly. An interesting statistic suggests that his clients do understand: 62 percent of them have contracted for a purchasing plan in which the investor puts in a set amount of new money each month. It's what the Americans call dollar cost averaging, a scheme designed to smooth out what could otherwise be a roller-coaster ride of investing.

Sawakami built in a disincentive for clients who might think of cashing out: They must pay into the fund, for the benefit of its other owners, 1.5 percent of the value of the assets they withdraw. The result: There have been only one or two sell orders a month, Sawakami says. "Because nobody sells, Sawakami Fund subscribers feel very assured, believing that all the other subscribers have the same purpose." However, since many of his subscribers are investing for their old age, Sawakami is modifying the system to permit, by the end of this year, withdrawals of up to ¥1 million a month without penalty. That will allow for the situations of subscribers who reach stages in their lives when they need income; selling enough to live on each month, they can use the fund in effect as a pension plan.

The main factor slowing that change in the fund's rules is the necessity to install new software. Indeed, Sawakami says finding the budget to pay for all the desired software is a real problem across the board for a small, independent fund-management company in its startup phase. Although he characterizes his business as highly computerized, he adds that it remains "very labor-intensive." Real people have to handle the incoming and outgoing mail exchanges with subscribers. "Even I help open the envelopes."

Getting to the next stage requires sacrifices: During the Golden Week holidays, Sawakami and several employees went to the office each day to work with software engineers who are preparing systems capable of handling between 100,000 and 200,000 accounts. That sounds like a lot, considering that as of May his customers numbered under 18,000 and his fund's total assets were valued at only ¥17.1 billion, toward the lower end of the scale in the funds world. But what you see now "is just the tiny tip of the iceberg," he asserts. Within a year he expects assets to double to the ¥33 billion level, which he says is the break-even point at which the company can become profitable. An illustration of how confident he is about what happens after that: One of the reasons he largely avoids investing in smaller companies' stocks, he says, is that his fund will in due course be too big to move nimbly in the relatively un-liquid markets for small caps.

Whether Sawakami can meet his own goals or not, investment trusts' tiny degree of penetration in Japan, compared with, for example, the United States, suggests that the market here has plenty of room to grow. What it will take, Sawakami believes, is for a new sort of money managers to persuade the public that there is an attractive alternative to what he contemptuously dismisses as the "broker-oriented investment trusts with horrible performance" that have dashed Japanese investors' hopes in the past. He figures it will take about three years to really get large numbers of people thinking. "In five years' time, I believe a landslide effect starts. The better we perform, the more money comes to us." And after a decade, he predicts, the market penetration of investment trusts will have quadrupled, from 2.4 percent to around 10 percent.

One more indicator that might suggest he's on to something is the age of his subscribers. By age, those in their 30s are the largest group, followed by those in their 20s and 40s. That's in an investment trust industry whose most avid investors in the past, he says, have been in their 60s.

Sensing possibilities for major growth in the market, foreign fund-management companies such as Vanguard, the US leader in indexing, are coming in. Sawakami says he encourages the entry of foreign-backed boutique-type investment houses, figuring that more competition will only expand his end of the market. (Fidelity, of course, is already present in force in Japan. But Sawakami thinks the Boston-based giant would do better with a single, large, retail-oriented fund -- like the Magellan Fund, on which Fidelity built its early success in the United States -- than it will do with its current Japan lineup of dozens of funds. Fund proliferation, he argues, "makes only confusion for the customer.")

There are, of course, many things that could go wrong with Sawakami's grand predictions. The market could enter a long period of stagnancy or further decline in which even the customers he has converted to long-term investing finally grow impatient and leave the market. There could be further debacles involving higher-profile funds, of such magnitude as to send even the bolder Japanese back to the pitiful returns of their bank and postal savings accounts. A fund that grows considerably larger than today's small one would prove, almost inevitably, to be far more of a challenge to manage -- and the skills of Sawakami and his colleagues might fail eventually to keep pace. "Sawakami-san is very sound," says one industry colleague who prefers not to be identified. But he adds that there's nothing in Sawakami's experience at Pictet and now in his own firm to show that he has what it takes to run a very large and complicated organization well.

Only time will tell whether his creation will continue to grow in line with his best-laid plans or, like a hefty percentage of other companies incubated in the startup craze of the last couple of years, leave its founder with egg on his face. Nevertheless, Sawakami these days is not only counting his unhatched chicks; he's already planning on how to give them away. Pointing approvingly to a nature-preservation campaign mounted in Nagano prefecture by Canadian naturalist, writer, and television personality C.W. Nicol, the fund manager says he has in mind using the wealth he expects to accumulate to set up something like Britain's National Trust. "We'll move our office to the countryside in the future," he says. And "in 10 years' time I'm giving 100 percent of my company's shares to a non-profit organization" -- one that, once he establishes it, will be dedicated to the restoration and protection of Japan's natural areas.