Japan retail investors warm up to commodities

TOKYO (Reuters) - Japanese retail investors who missed out on a previous commodities boom are scrambling to catch this year's bounce, determined not to lose the chance to cash in on emerging market growth.

Fewer rules, greater awareness of commodities markets and a spate of commodities-related investment vehicles launched in the past two months have whetted unexpectedly strong demand from savers holding a whopping $15 trillion, of which less than one-tenth of a percent is invested in raw materials now.

Coupled with a surge in global investment and fund flows into commodities that drove up the benchmark Reuters Jefferies CRB .CRB index by 14 percent in May, racking up its biggest monthly gain in 35 years, even a fraction of Japan's savings deployed in small oil, copper or gold markets could fuel another burst.

The pent-up appetite was spotlighted when investment in Daiwa Asset Management's second commodities fund -- launched in April, more than four years after its first -- swelled 60 percent to 55.6 billion yen ($566 million), from the 32.5 billion it initially drew, of which about 17 billion yen is estimated to be new money invested.

"The fund has grown more than I expected. I sense investors have deepened their understanding of commodities," said Shogo Yoneyama of Daiwa Asset's product planning department.

"Customers' attitude toward commodities is entirely different now from 2004. It seems they were waiting for the moment to buy," he said.

During the commodities bubble of the past year Japanese retail investors stayed away, wary of surging prices that made them reluctant to increase exposure to less familiar products than the conventional stock or bond funds, market analysts said.

Daiwa Asset set the trend for commodities-related fund offerings by other asset firms, helping to boost the market's overall asset value to about 200 billion yen by 2007.

Still, the commodity fund market has lagged booming stock funds, and shrank when all other financial markets collapsed.

The asset value of Daiwa's first commodities mutual fund 62004847JP.LP fell to a low of 2.7 billion yen ($27.5 million) in February, a fifth of its peak of 12 billion yen in July 2006.

In the year to December 2008, the fund faced a net outflow of $35.195 million as investors withdrew money.

Many Japanese retail investors are still licking wounds from the financial crisis, but yield-hungry individuals could also see the recent run-up in commodities as a chance to snap up bargains.

In contrast, Japanese institutional investors, such as life insurers and pension funds, still shun commodities investments as risky.

Japanese individuals, also known for dealing actively in risky instruments such as margin foreign exchange trading, have been actively investing billions of dollars in the U.S. junk bond market through mutual funds since the start of the year.

ETF IN SPOTLIGHT

Commodities-linked exchange-traded funds (ETFs) have also gained popularity in Japan, especially as gold-backed ETFs have shown explosive growth -- for some time gold was the only asset to gain during the financial crisis.

Barclays Global Investors launched its iShares Silver Trust SLV.A, the world's largest silver-based ETF, and another commodities-related ETF, in Japan in May.

"Investors feel safer having commodity funds in their portfolios as a way of diversification and controlling volatility," said Kentaro Sekizuka, head of securities at Barclays Global Investors Japan.

Last year, the Tokyo Stock Exchange TSE.UL cross-listed State Street Global Advisors' (STT.N) SPDR Gold Shares ETF (1326.T), which is still drawing big demand, and the trend is expected to continue.

The Japanese ETF market has increased steadily since the funds were first offered in 2001, with the number of ETFs rising more than seven times to 66 funds from eight years ago, the investment trusts association of Japan data showed.

Yet the total value of ETFs -- excluding cross-listed funds launched outside Japan such as the SPDR gold ETF -- fell to 2.3 trillion yen, or nearly a third from a July 2007 peak of 6.1 trillion, due to plunges in shares and asset prices.

"The ETF market in general has been attracting strong demand. Funds have not only flowed into stock-related ETFs, but one key reason behind the overall increase is the rising demand for gold ETFs," said Tom Fujita, managing director at Nikko Citigroup Ltd.

Separately, a retail-targeted mutual fund that directly trades NYMEX crude oil futures will start taking subscriptions on June 15 and launches on July 1.

The new fund will be marketed by Daiwa Securities Group Inc (8601.T), Japan's second-largest brokerage and managed by Astmax Co Ltd, a top commodities trading advisor, and its investment partners, a unit of major trading firm Itochu (8001.T).

It will be the first publicly placed investment trust fund to directly invest in commodities since rules were relaxed in 2008.

"The environment is favorable for us, as deregulation and heightened retail investor interest in commodities mean demand for really experienced commodity fund managers, who have become scarce after the financial crisis, will only grow," said Tetsu Emori, a fund manager at Astmax.

Analysts say the launches come as prices of commodities and other assets showed signs of recovering to levels prevailing before the collapse of Lehman Brothers threw global financial markets into turmoil.

The return of risk money is evident in commodities markets, given the view they are bound to gain as inventories get trimmed.

Improving markets and a need to recoup 2008 losses will prompt investors to pour $50 billion into hedge funds this year and slow redemptions, Barclays Capital said in a recent report.

"Commodity-linked investment is interesting and it's not a wrong choice to invest in commodities now in terms of returns," said Takeshi Iio, a senior fund manager at Mitsubishi UFJ Asset Management.

($1=98.30 Yen)

(Editing by Clarence Fernandez)