Japan's Artificial Intelligence Funds on the Rise

Japan’s artificial intelligence funds on the rise
The popularity of artificial intelligence (AI) and robotics funds is partly due to their long-term growth stories

May 2018, Singapore. Japan’s AI and robotics-related funds have been getting popular in recent years, overtaking monthly dividend payout funds, against a backdrop of tightening regulatory control and obligations for the asset management industry to fulfill its fiduciary duties.

AI and robotics funds have been standing out because they are aimed at long-term investment, stemming from AI-related companies’ long-term perspectives. Because of the nature of these funds, the countries they invest in are mostly developed ones, such as the United States, Japan, and Germany. The main sectors invested in include information technology, consumer goods, and healthcare, which are seen as adding to corporate value as well as companies’ stock prices.

Another reason for their popularity is that they pay dividends less frequently—only once or twice per year, or at a varying frequency under the same fund name—a feature that appeals to both the Financial Services Agency (FSA) and distributors. Although monthly dividend payouts used to be popular, especially with more mature and affluent investors, which represent more than 60% of mutual fund investors, the FSA doubts if these funds can help grow investors’ wealth as they often deliver dividends beyond what they can pay, and eat away at the principal. Consequently, distributors have been removing monthly dividend payout funds from their focused fund lists, resulting in assets under management in such funds falling to ¥30.6 trillion (US$271.7 billion) in 2017, after peaking in 2017 at ¥42.7 trillion.

On the other hand, managers are doubtful as to whether investors have full knowledge about these products. After all, long-term growth potential was seen as a selling point of Brazilian real-based funds, whose boom proved to be short-lived, as assets in 2017 fell to almost a quarter of their peak in 2010. Some observers wonder if a similar story will be repeated in the case of AI-themed funds.

Whatever the trends, managers in Japan should try to ensure that the funds they launch carry good growth stories that will attract investors, and have features that can help managers meet their fiduciary duties.

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