Alliance Capital is one of the few asset management companies bucking a trend toward setting up joint ventures in Japan.

Since 1996, U.S. fund companies and banks that manage mutual funds have been rushing to avail themselves of a freer regulatory environment in Japan. Many have opted for joint ventures with Japanese distributors as a quick and cheap way to gain entry into a growing retail investment market.

But New York-based Alliance, which has had an institutional presence in Japan for more than a decade, hopes it can sidestep some pitfalls by distributing its wares through many outlets rather than through an exclusive partnership.

"Broader distribution is better." said Jon Groom, an Alliance senior vice president and director of offshore sales and marketing.

Alliance first established a Japanese presence in the late 1980s with a small sales and marketing effort in Tokyo. In 1996, Japanese authorities opened up the retail investment market to foreigners, issuing licenses to outsiders to sell mutual funds to Japanese investors.

Armed with an "investment trust management company" license, Alliance launched its first Japanese mutual fund in January 1997. The New York company now manages seven funds in the country, distributing them through brokers like Nikko Securities and Kokasai Securities.

Alliance has relationships with 15 brokerage houses and insurers and manages $6 billion of assets for Japanese investors, $4.3 billion of that in mutual funds.

Alliance, which has 43 people on the ground in Japan, is second only to Goldman, Sachs & Co. among foreign managers of Japanese mutual funds. Goldman Sachs Asset Management had $14.1 billion under management at the end of 1998. Alliance manages $300 billion worldwide.

Having an established presence in Japan was a boon for Alliance when the country's Big Bang reforms got under way last year, Mr. Groom said.

"When the rules changed, we were well positioned to take advantage of the situation," he said.

But other asset managers have come late to the party and are using joint ventures to jump into the action-in part because they are a way to avoid the steep cost of starting from scratch.

Business alliances between foreign companies and their Japanese peers have grown steadily in the past three years, according to Ben Phillips, an analyst with Cerulli Associates, Boston.

In 1996, there were 25 such marriages, and in 1998 there were 29 in anticipation of deregulation.

By December 1998, when Japanese regulators gave banks and insurers the green light to sell mutual funds directly to the public, 81 foreign companies had formed alliances with Japanese partners, among them many U.S. banks and fund companies.

With an underfunded pension system and an existing savings culture, albeit one that leans toward deposit accounts, Japan presents a golden opportunity for U.S. companies to increase their asset base.

"They're severely underfunded to the point of catastrophe," said Mr. Phillips.

Japan's pension market alone is estimated at $1.2 trillion, and some analysts say the Japanese may have as much as $10 trillion to invest. Japanese investors currently own $376 billion in mutual funds, Mr. Phillips said.

But it will be some time before the Japanese are pouring money into the equity market with the same enthusiasm as U.S. investors.

"The Japanese are very risk-averse," said Mr. Groom, adding that most of the "real money" is held by people over the age of 50. "And if you want to tackle them, you're going to have to go after them with fixed-income and money-market funds," he said.

To that end, only two of Alliance's Japanese funds invest in equities.

Japan's potential has set off a scramble among asset managers hoping to snare a piece of the action. But Mr. Groom said he is undeterred by the increase in competition caused by the flood of alliances.

"Any time you get a good market, you're going to get competition," he said.

Mr. Phillips believes that Alliance and other U.S. fund companies operating solo in Japan need not worry about the new arrivals too much: according to a recent study he authored, the majority of cross-border alliances fail within three years.

The study, which focuses on Japan, was published in January and outlines a number of potential pitfalls in approaching the Japanese market through a joint venture.

Continued instability in the Japanese financial sector is just one problem, the study concludes.

"The Japanese partner may not survive the rapidly shifting banking and insurance environment," according to the study.

Mr. Phillips cited the case of Murray Johnstone, a Scottish asset manager, that found itself without a partner when Yamaichi Securities failed in 1997.

Yamaichi subsequently sold its institutional business to Societe Generale of France, while Merrill Lynch & Co. took over its retail branch network, which has proved a costly venture for them.

"The Japanese hate their brokers," Mr. Phillips said, noting that some brokers have developed a reputation for overtrading customer accounts. "Merrill's had to work against that."

And annual results posted in April by Japan's Big Three brokerage firms- Nomura Securities, Daiwa Securities, and Nikko Securities-underscore Mr. Phillips' predictions for Japanese financial services industry.

All three posted huge losses, with Nomura, the nation's biggest broker- dealer, taking a $3.3 billion hit. The firm said its losses stemmed from the need to bail out an affiliate as well as volatility in overseas bond trading.

However, Mr. Phillips isn't predicting doom and gloom for all joint ventures. He points to J.P. Morgan & Co.'s recent alliance with Dai-Ichi Kangyo Bank as displaying signs of health.

Following deregulation in December, Dai-Ichi's pending joint venture with Morgan helped the bank snare some 37% of the first week's mutual fund sales, according to the Cerulli study. Morgan and Dai-Ichi formalized the arrangement in April, setting up a new company.

But Dai-Ichi is rumored to be in merger discussions with Fuji Bank, which could put existing joint ventures in jeopardy, he said.

BlackRock Inc.'s recent decision to form a new company with Nomura Asset Management may also prove a wise one, said Mr. Phillips. BlackRock, a unit of Pittsburgh-based PNC Bank Corp., unveiled a joint venture with Nomura in March.

"BlackRock and Nomura was a natural progression," he said, adding that the two companies had already been involved in an asset management alliance for 18 months.

Indeed, when the new company was unveiled in March, Laurence Fink, chairman and chief executive officer at BlackRock, likened the formation of the company to a marriage following a courtship.

Massachusetts Financial Services is open to a joint venture, but for now is following Alliance's lead in forming several distribution agreements, said Arnold D. Scott, senior executive vice president at MFS.

"Joint ventures are hard to hold together," said Mr. Scott, whose company started seeking distribution agreements late last year. "Both sides have got to work at keeping the joint business uppermost in mind."

And the risk that more Japanese distribution firms will fail is very real, he said: "I think there's still some of that to come."

But whether U.S. companies approach the Japanese markets through joint ventures or by forming simpler distribution agreements, Japanese firms are welcoming them with open arms.

"The Japanese are interested in being allied with an American firm because it gives them credibility," said Mr. Groom.

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