Institutional trading slows in Japanese stocks

Thursday, January 20, 2011 Stamford, CT USA — A global slowdown in trading and a move by Japanese institutional investors to reduce the share of their portfolios devoted to domestic stocks conspired to reduce Japanese equity trading volumes last year according to the results of Greenwich Associates' 2010 Japanese Equity Investors Study.

The findings of that study were released today in a report that also names Nomura Securities as the 2010 Greenwich Quality Leader in Japanese Equity Sales, Research, and Trading and identifies market share leaders in each of these businesses.

Trading Slowdown
The amount of brokerage commissions paid by institutions in Japan and Asia on trades of Japanese equities contracted by more than 20% from 2009 to 2010 amid a market-wide slowdown in trading activity, marking the second consecutive year of significant declines.

During the challenging period of 2008-2009, the value of Japanese equities held in institutional portfolios fell by 38%. Over that same period, the pool of commissions paid by institutions to brokers of trades of Japanese equities shrunk by 27%. Coming into 2010, institutions and brokers alike were hopeful that a recovery in the global economy and capital markets would reverse those declines. The normalization of market conditions early in the year was not enough to reverse the erosion of Japanese equity valuations, but it did slow them considerably. From Q3 2009 to Q3 2010 the value of Japanese equity assets under management among institutions in Japan and Asia declined by approximately 6%. Over that same period, however, the amount of institutional brokerage commissions paid on trades of Japanese equities fell by another 24%.

Several forces have been working to shrink the institutional commission pool. Securities markets around the world suffered from an unexpected slowdown in trading activity last year. Global equity brokers and fixed-income dealers started the year with expectations that a gradual global recovery would draw investors back into markets and generate an increase in institutional trading volumes. However, a lack of conviction among investors about the strength of the recovery prompted institutions to keep capital on the sidelines, and trading volumes in both equities and fixed income suffered. "This cyclical slowdown combined with the more secular shift away from domestic stocks by Japanese institutions to limit the size of the commission pool last year," says Greenwich Associates consultant John Feng.

Shrinking Allocations to Domestic Stocks
From Q3 2009 to Q3 2010, corporate pension funds in Japan reduced their average allocation to active domestic equities to 9.9% of total assets from 11.0% while increasing allocations to active international equities to 9.7% from 9.1%. Looking forward, the number of Japanese institutions overall planning to reduce target allocations to active domestic equities is more than seven times larger than the number planning to increase. Among corporate funds that ratio is 8:1. In passive domestic equities, institutions are four times more likely to report plans to cut target allocations than to report plans to increase.

"Institutions' cuts to domestic equity allocations are being driven by two related trends," says Greenwich Associates consultant Tomio Sumiyoshi. "Institutions are broadly working to de-risk their portfolios, which in many cases entails shifting assets out of equities and into fixed income and other lower-risk asset classes. At the same time, they are working to reduce home bias in their investment portfolios, which entails shifting out of Japanese securities and into other Asian and global investments."

Nomura Named Greenwich Quality Leader in Japanese Equity Brokerage
Every year, Greenwich Associates names leaders in Japanese Equity Brokerage in terms of market share and quality of service delivered to institutions in the Greenwich Associates universe of investors domiciled in Japan and Asia. Greenwich Share Leaders are identified based on weighted share of research/advisory "vote" and trading commissions in Japanese equities allocated to individual brokers by institutions. Greenwich Quality Leaders are firms that have distinguished themselves by receiving quality ratings from institutional clients that exceed those awarded to competitors by a statistically significant margin.

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