Japan's fund management sector needs to develop attractive products focused on fast-growing Asian economies and shift to a more incentive-based compensation structure to attract key talent, add clients at home and abroad, and lift profit margins to global industry levels, according to a new white paper by Casey, Quirk & Associates, LLC and the Nomura Research Institute, Ltd. (NRI).

The white paper, "The Sun Also Rises," jointly produced by Casey Quirk, a management consulting firm serving the global asset management industry, and NRI, a leading Japanese management consulting firm, recommends that Japanese asset managers make significant changes in their business models to strengthen their competitive position.

While Japan's fund managers operate in the world's third-largest pool of professionally managed assets and enjoy favored status at home, approximately 80% of Japanese mutual funds generate insufficient fee revenue to cover costs, the overwhelming reliance on domestic products means they are shut out of the growth opportunities from increasing interest in global investments, and their salary-driven compensation structure is inflexible, according to Casey Quirk and NRI.

Profit margins for Japanese fund managers were approximately 20%, compared with over 30% for their US counterparts and almost 40% in Europe, according to the analysis by Casey Quirk and NRI for the most recent data available. Moreover, due to the salary-based structure of Japanese asset managers, overall compensation as a percentage of total expenses rose even as revenue fell during the financial crisis. By contrast, compensation among US money managers fell relative to total expenses as bonuses were cut.

"Japanese managers suffer from a profitability gap with their global counterparts,'' said Yariv Itah, partner at Casey Quirk. "More of them should be looking for ways to modify compensation structures while remaining faithful to their core cultural tenets. Firms that wish to attract top talent and compete effectively at the global level simply do not have a choice."

"Changing the compensation culture is vital for Japan's fund managers to attract and retain key talent necessary to upgrade the investment and product development processes,'' said Sadayuki Horie, senior researcher for NRI. "That, in turn, would allow the firms to introduce Asian region equity products that would attract Japanese and international investors.''