Japan leads the region in passive equity investing

13th March 2017

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Migration of assets from active to passive funds continued at a fast pace in 2016. Passive equity funds accounted for 44.1% of the AUM of all equity funds domiciled in Asia, or $259bn out of the total $582bn of assets under management as of 31 December 2016, according to data from Morningstar. The percentage has approximately doubled during the last decade.

Assets in passive funds as a share of all equity funds.

However, the number is large because Japan accounts for more than half of the amount. The Japanese government has been buying domestic exchange-traded funds (ETFs) since 2010 as part of its stimulus plan. Japanese ETFs are now the top six passive investment vehicles domiciled in Asia by asset value and they alone account for $139bn out of the $259bn.

Fund Name	Domicile	Net Assets (billions US$)
Nomura Nikkei225 Listed ETF	Japan	34.7
Nomura Topix Listed ETF	Japan	33.3
Nikko Nikkei225 Listed ETF	Japan	17.0
Daiwa Nikkei225 Listed ETF	Japan	16.1
Daiwa Topix Listed ETF	Japan	15.5
Nikko Topix Listed ETF	Japan	14.7
Tracker Fund of Hong Kong	Hong Kong	10.4
MAXIS Nikkei 225 ETF	Japan	7.7
Hang Seng H-Share ETF	Hong Kong	5.8
Hang Seng ETF	Hong Kong	5.7

Japan’s allocation to passive equity products appears to be set to increase. On 13 March, Japan’s Government Pension Investment Fund (GPIF) introduced a new system to streamline the process of application and selection of asset managers.

The initial focus is on passive investment of Japanese equities and both active and passive investment of non-Japanese equities.

The announcement on GPIF’s website sets out the required qualifications the investment managers and the new process.

Hong Kong passive AUM

Among other markets in the region, Hong Kong stands out for a high share of passively-managed equity investments in terms of AUM. According to Morningstar, 59% of equity funds (in terms of AUM) domiciled in the territory are passively managed.

The number, however, does not truly reflect investment preferences of Hong Kong investors. Hong Kong-domiciled passive funds only number 58 out of a universe of 1754 total funds, across all asset classes, authorised for sale by the Securities and Futures Commission.

In terms of percentage, Hong Kong actually has more AUM that is passively managed than Japan, according to Morningstar.

The dollar figure in the chart below reflects the AUM of all equity funds domiciled in Hong Kong versus the same in Japan. The percentage is for the amount of that AUM that is passively managed.