BOJ-inspired ETFs for big-spending Japan firms struggle to get investors

By Tomo Uetake

TOKYO (Reuters) - Japanese asset managers answered the Bank of Japan's call to set up exchange traded funds comprising companies who invest in their staff and facilities. But investors have not been attracted to the ETFs, even though the central bank is helping them.

In late 2015, BOJ Japan Governor Haruhiko Kuroda called for creation of ETFs for firms "proactively making investment in physical and human capital".

The central bank, which already owns about half of all Japanese ETFs, pledged to buy about 300 billion yen ($2.94 billion) a year of the new type as part of enhanced stimulus moves.

Six such funds have been launched since May 19. But the response of institutional and retail investors has been subdued, with not many convinced of the merit of such investing.

If others don't put significant money into the ETFs, that could thwart the BOJ's plan to invest 300 billion yen annually, as rules bar the central bank from holding more than 50 percent of funds.

The BOJ is estimated to have bought 16.5 billion yen of such eligible ETFs in June, according to industry sources.

At the heart of investor coolness towards the ETFs is doubt higher investment translates to higher profits.

Buying companies on the basis they spend a lot "just doesn't work", said Seichiro Uchi, managing director for index compiler MSCI in Tokyo.

"Capital and personnel expenses are a cost," he said. "Companies with higher capital spending tend to underperform in the share market. There are academic papers on it and everyone knows that in the industry."

IN-LINE PERFORMANCE

Index providers including the Japan Exchange Group and S&P Dow Jones Indices created four stock indices with companies that meet a certain criteria in spending, such as the efficiency of capital expenditure.

Offering ETFs are Nomura, Daiwa, Nikko, BlackRock, DIAM and Mitsubishi UFJ Kokusai, which invest in about 150-270 companies. Most funds include blue-chips such as Toyota Motor , KDDI and Murata Manufacturing .

So far, performance has been mostly in line - or slightly above - the Topix <.TOPX>. In June, the Next Funds Nomura enterprise value allocation index ETF and the Daiwa ETF MSCI Japan human and physical investment index both fell 8.6 percent, compared to the Topix's 9.7 percent drop.

Being in line with the overall market, however, is not a strong sales pitch.

"My first impression is that you can't just invest in companies just because they are making investment in facilities and human resources," said Isao Takenami, who manages the pension fund for Japan's biggest steelmaker Nippon Steel & Sumitomo Metal .

"Unless we have conviction that they are making efficient investment over the long-term, investors won't be able to buy them," he said.

Some asset management firms have had their related companies make substantial investments as "seed money" for their funds to facilitate purchases by the BOJ. DIAM and Daiwa received 40 billion yen and 30 billion yen, respectively, from affiliated firms.

Shingo Ide, chief equity strategist at NLI Research Institute, said it is "hard to expect these funds will gain popularity at once" unless influential investors such as Japan's public pension fund GPIF decide to buy them.

(Reporting by Tomo Uetake; Editing by Richard Borsuk)