Japan 'toushin' funds see outflows after reprimand from FSA

By Tomo Uetake and Hideyuki Sano TOKYO (Reuters) - Japanese investment trusts, or "toushin", saw the first net outflow of funds in six months in April, industry data showed on Tuesday, following scathing criticism of the industry from the head of the country's financial watchdog. Investors pulled 31.1 billion yen (£212.2 million) of funds from toushin in April, the first monthly net outflow since October. In another indication of the slowdown in business, the number of new fund launches in May was also likely to be around 20 - the lowest since data was available from 2007, said the Investment Trusts Association, Japan. If outflows from the toushin funds accelerate, that could force fund operators to sell assets, which will affect markets. Industry officials say many financial institutions have slowed or refrained from aggressive sales of some toushin funds after Nobuchika Mori, the commissioner of the Financial Services Agency, blasted the Japanese asset management industry for not catering to the true benefit of its customers. In a speech to financial professionals in early April, Mori railed at Japanese investment trusts' high fees and low investment returns. The average return of about 280 active Japanese stock funds is 1.4 percent over the last 10 years after deducting fees, with a third of them making losses, compared to average annual gains of 3 percent in the Nikkei share average <.N225>, he said. Noting that a panel of experts had concluded that 99 percent of toushins were unsuitable for long-term investment, Mori called on fund operators to take action. "How long are you going to keep this practise? Would customers who could not get a decent return on financial products they bought increase investment?" Mori challenged industry officials. Shocked by his blunt public rebuke, asset management firms virtually stopped sales activities, industry sources said. "After the FSA's comments, sales staff are in the dark on what they should sell, or recommend to their customers," said an executive at a European asset management firm. They say net fund outflows appear to be increasing in May. Asset management firms are expected to disclose plans in June to make themselves more customer-oriented. "The number of new fund launches is declining because Mr. Mori's severe comments are making it difficult for asset managers to create funds lightly," said Noriyuki Morimoto, chief executive officer at HC Asset Management. Yoshio Okubo, vice chairman of the Investment Trusts Association, said he cannot rule out the possibility Mori's comments had some impact, adding that the industry will try to win back public confidence. The Japanese investment trust industry manages about $1 trillion yen (£775.5 billion) of assets, channelling Japanese investors' funds to stocks, foreign bonds and currency markets. (Additional reporting by Emi Emoto; Editing by Jacqueline Wong)