An Analysis of the Relative Performance of Japanese and Foreign Money Management

Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in thepast two years. In part, the relative success of foreign managed firms in attracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramaticfashion over the past two decades. This is at best indirect evidence that Japanese funds underperform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that theunderperformance can be attributed almost entirely to the unique tax environment of Japanese investment trusts. In this paper we examine the relative performance issue directly by looking at week by week returns for the period January 23, 1998 through to January 14, 2000. Contrary to popularperception, Japanese managers actually outperformed their foreign counterparts over this period of time. Perhaps this indicates that Japanese managers are more skillful. However, the evidence suggests that theyhappened to be in the right place at the right time. We attribute the superiorperformance to the asset allocation decision, rather than to any superior skill in selecting securities