ANALYSIS - Japan eyes commodity boom as home-grown ETFs launch

TOKYO (Reuters) - A trickle of recently-launched commodity-linked funds in Japan is set to swell in coming years as stodgy savers, pension funds and regional banks search for higher returns beyond the usual mix of bonds and equities.

Money managers looking to offer more commodity asset products to customers are eyeing a share of an estimated $20 trillion pool of investment funds -- or 1.5 times U.S. GDP -- held by retail investors, life insurers and corporate pension funds.

Less than 1 percent of that money is now invested in commodity-linked products. But a growing number of local exchange traded funds (ETFs) are stirring up interest, fund managers say.

ETFs are popular with Japanese investors who feel comfortable with "toushin", or investment trusts, said Kentaro Obata, head of the asset management division of Astmax, Japan's top commodities fund manager.

"Interest in commodities-linked products has been clearly growing from asset management firms, securities houses and regional banks, especially since the start of the year," Obata said.

"This tells us that commodities are more widely accepted by retail investors, a trend that will spread to institutions."

ETFs can hold stocks or future and physical contracts and trade at unit prices like a mutual fund against an underlying value.

The asset value of Japan's ETF market stood at about $24.63 billion by the end of last year, according to a January report by U.S. hedge fund BlackRock Inc, which ranks it at the top of the Asia-Pacific region, despite being just 3.5 percent of the United States, the world's No.1 market.

NEW FUNDS, PRODUCTS

Two ETFs tracking TOCOM futures were launched on the Osaka Securities Exchange this month -- the Mizuho Gold ETF, and the NF Platinum Index.

Mizuho Asset Management President Shinichiro Tanaka said his company was keen to offer more commodities-related mutual funds, or ETFs, in the future to retail and institutional investors.

"We still believe commodities are an effective asset class, which investors can hold to diversify," Tanaka said. "We hope to see our ETF grow to 10 billion to 20 billion yen in one year."

Even as investors seek to widen their options, new flows into commodity investments are expected to be modest at first.

"Many pension funds must cut back heavy exposure to stocks in order to achieve risk diversification," said Mitsuhiro Arakawa, an executive consultant at Russell Investments in Tokyo.

"I expect in the not-too distant future that pension funds will make small investments in commodities, with visible changes seen in about five years from now."

Corporate pension funds hold 60 to 70 trillion yen, or $666 billion to $776 billion in assets and on average hold around 40 percent in bonds, both domestic and foreign, and about 30 percent in stocks, Japanese and foreign.

CAUTION THE RULE

The pension funds are normally ultra-conservative on portfolio choices because of internal allocation rules that specify four large, liquid assets -- Japanese government bonds, foreign government bonds, Japanese stocks and foreign stocks.

But the same Japanese institutions have recently shown more risk appetite by investing in hedge funds and funds of hedge funds and a surge in commodities trading is seen as the next wave globally.

Firms have already ordered consultant studies on commodity investment options and are making tentative buys, one money manager said.

"We are receiving more queries from institutionals, such as regional banks, about commodities with some buying funds, although the investment amount is small," said Ryosuke Okazaki, chief investment officer at ITC Investment Partners Corp.

"Japanese commodities investment in portfolios is close to zero now but that means there is a huge pick-up in terms of percentage change. This trend is irreversible."

ITC Investment this month launched Japan's first fund that allows exposure to contracts such as gold futures on the Tokyo Commodity Exchange, the country's largest.

Last year, ITC Investment launched a mutual fund aimed at profiting from NYMEX crude oil futures.

The next decade will see many funds moving as much as 20 percent of their holdings into alternative investments including hedge funds, funds of funds and managed futures and commodities,a money manager said.

"There is a renewed focus on assets that have little correlation to traditional alternative assets, such as real estate," said Tatsuro Karitani, senior manager at DIAM Co, an equal joint venture between Mizuho Financial and Dai-Ichi Mutual Life Insurance Co.

(Editing by Ed Lane)

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