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Index funds overtake active funds for first time in Japan

Investors choose lower-fee products as they seek to grow retirement savings

World market indexes on display in Tokyo. Passive funds track such indexes, while active funds require hands-on management.   © Reuters

TOKYO -- Japanese investors socked away more money in index funds than in more actively managed funds for the first time, as they seek out cheaper options to make up for shortfalls in their retirement savings.

Net assets managed by index funds, which track key stock indexes like the Nikkei Stock Average or the S&P 500, jumped 29% in 2019 to 50.95 trillion yen ($465 billion), according to Mitsubishi Asset Brains. Net assets managed by active funds increased 6% to 43.95 trillion yen.

More people started investing after hearing about a report last year that Japanese couples on average will need an extra 20 million yen in retirement, which led to worries about not having sufficient nest eggs. Passive funds grew in popularity due to their lower fees -- a feature of instruments requiring less involvement by managers than active funds -- and are increasingly seen as an attractive option for those seeking long-term, stable investments.

Index fund portfolios have grown more than threefold in the past five years. When excluding the Bank of Japan's roughly 24 trillion yen in purchases of exchange-traded funds, growth comes to 70% for the period.

Meanwhile, investors are dumping active funds with monthly payouts, which were popular until the mid-2010s, as lower interest rates squeeze returns.

The average annual fee for passive funds was 0.71% of net assets, compared with 1.36% for active funds. Some passive funds now have fees of only around 0.1%.

Investors are shifting their focus to passive funds outside Japan as well. U.S. stock index funds overtook active stock funds for the first time in August, according to U.S. investment research company Morningstar. Passive funds now make up about 40% of all mutual funds in the U.S.

But some market watchers are concerned by the trend. "When components of a stock index are bought as a bundle, struggling companies could end up with share prices that don't reflect how they are actually doing," said Makoto Sengoku, senior equity market analyst at the Tokai Tokyo Research Institute.

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