A few questions regarding risk of fund / brokerage collapse

[tokyojoe]

Dear All,
I am interested in what perspectives you may have on the risk and consequences of a fund collapsing,
such as happened relatively recently with the funds run by Neil Woodford
(https://www.thisismoney.co.uk/money/new ... -firm.html)
I invest mainly in low-cost index funds such as the eMaxis funds - are these funds somewhat safer than
the actively managed funds (less risk of human error, no-one trying to outdo the market etc.)?
Are ETFs somewhat safer still in this regard than mutual funds since they can be freely bought and sold like shares ?

Incidentally what about if your online brokerage collapses, I guess any cash balance you are holding would be gone,
but how about any shares? (I read somewhere that some US brokerages don't actually register the shares in the
customer's name but 'hold them on their behalf', which to me sounds a bit more risky if the brokerage goes bankrupt.)
Is anyone splitting their investments over two or more brokerages ?

[Kanto]

Dear All,
I am interested in what perspectives you may have on the risk and consequences of a fund collapsing,
such as happened relatively recently with the funds run by Neil Woodford
(https://www.thisismoney.co.uk/money/new ... -firm.html)
I invest mainly in low-cost index funds such as the eMaxis funds - are these funds somewhat safer than
the actively managed funds (less risk of human error, no-one trying to outdo the market etc.)?
Are ETFs somewhat safer still in this regard than mutual funds since they can be freely bought and sold like shares ?

Incidentally what about if your online brokerage collapses, I guess any cash balance you are holding would be gone,
but how about any shares? (I read somewhere that some US brokerages don't actually register the shares in the
customer's name but 'hold them on their behalf', which to me sounds a bit more risky if the brokerage goes bankrupt.)
Is anyone splitting their investments over two or more brokerages ?

Just like with a bank you are covered for up 10 million. http://jipf.or.jp/en/about/index.html

I plan to use 3 different securities accounts eventually.

1 for taxable
1 for Nisa
1 for iDeco

Emaxis funds will not collapse. They are run by MUFJ the fifth-largest bank in the world.

https://www.relbanks.com/worlds-top-banks/assets

If you are worried about it, stick with the largest consumer banks Yucho, and MUFJ.

When it comes to brokerages stick with the big guys Rakuen, Monex, SBI and avoid the app based brokers.

[mule96]

There are a couple of points:

- The Fund was actively managed with costs of around 1.6%. Such funds usually attract and are made for investors who expect returns above the market (there are many topics on how they fail).
- It seems to have invested in 40 mid to small cap stocks, mostly uk, and underpeformed FTSE All Share Index (= All UK, 608 Stocks, representing 98-99%, that indext didnt to well also over the last 5 years) by around 40% over 4 years, especially before corona. I assume that companies where sold and bought during that time. Such funds have compared to major index funds/etfs
- It seems to have initially got around 500 Million GBP, but due to the lack of performance cash seems to been have withdrawn from it.
- As you said, the investors will not lose their complete investment, but the fund will be dissolved, stocks sold and they got what the valuation is at the same time. The UK financial regulators have rules and mechanisms in place, that investment companies need to follow, so that in cases like this the funds can be disolved properly. This is the same in major markets in the world including Japan.

There are some key differences with index funds/etfs:
- As you say, they don't need to beat the market, they are the market, so investors will not withdraw money, because the fund doesnt beat the market.
- The major index funds have also much higher capital investment. eMaxis all world is close to one billion and was openend by the end of 2018. With UFJ behind, and their other funds, it is less likely that they want to disolve it.
- The major index funds will go down with the market, but the destiny of indvidual companies has not that much influence it. While such smaller funds can lose quite fast.

The two possible scenarios:
- Your broker goes bankrupt: There are regulations in place, that their assets are seperated from their operations, and that operations can continue even in terms of a bankruptcy. The assets remain and at one point you will get access to them thorugh a different broker (assigned by the financial regulators). You could lose money that is just passing through, especially when it is in a foreign currency. But on the big long term scheme, that is dip. The same is valid for stocks. You would keep them.
- The fund manager goes bankrupt: Similar as in the uk. The fund would probably be disolved at market value and you get what it was worth. This can take some time though (1+ years). But it is not a loose all.

Some learnings and comments:
- The fund manager seems to be a very experienced fund manager, but like so many, he couldn't beat the market. Nothing new here.
- Even with 40 stocks (over quite a few industries), it is easy to underpeform the market. And the collapse of a stock has much more influence than in a broad index.
- There are people who split among brokers (including me: Me: SBI, Wife: Monney, Baby: Rakuten). I have a second account at SBI. Seeing my own comments above, this is probably not necessary...

[fools_gold]

I’ve been following the Woodford saga for a while. For some unknown reason his smug face keeps popping up in my news feed. He was a big shot fund manager who struck out on his own to start a new fund. It didn’t perform as well as people hoped, so he started taking more risks. This included investing a lot in unlisted shares and other illiquid assets. These are difficult to get rid of in a hurry, so the UK regulator places a limit on how much can be held in an open-ended fund (10% of total assets). Then a couple of his regular investments went bust and investors started heading for the door. To fund the redemptions, he sold a lot of his regular stocks. As a result, the percentage of illiquid assets grew to the point where the fund had to be frozen to give him time to sell them and get them back under 10%. All the time investors were losing money he continued to take millions in management fees. His Wikipedia entry now lists him as a "disgraced fund manager".

Regular index funds just follow the index, so there’s no pressure for managers to outperform. Also, your money goes into stocks that are openly traded on exchanges so there’s little chance of a Woodford style blowup.

If you’re worried about putting all your money in eMaxis Slim funds, then you could put some in Nissei’s no load funds too. They have a similar lineup and the fees are pretty competitive.

[tokyojoe]

Many thanks to fools_gold, Kanto and mule96 for the replies so far, these
are very re-assuring. I wasn't aware that the same bank deposit protection scheme
protected these brokerage accounts as well, that is a nice insurance.

I guess if all goes well my holdings may end up exceeding the 10 million yen mark
in which case Kanto's suggestion of splitting the deposits according to the investment
wrapper they are in makes sense.
I guess the problem comes (if you are worried about such things) when your tokutei
account starts heading over 10 million yen since I guess there is little point in starting
two tokutei accounts with separate brokerages, since then you would not be fully offsetting your losses against your gains ?
(i.e. you could end up paying more tax than you needed to).

I suppose in those circumstances the better option if you were heading substantially above the 10 million threshold
(if you still wished to split across a few brokerages- and mule96's comments describing how it shouldn't be particularly close to a total loss
seem to reduce the need for this somewhat) would be to instead start using the ippan accounts and go through the
tax submission procedures.

One final related thought (I probably worry too much about these things I know!), but is anyone worried
about the fact that with these online brokerages there is not so much in your hand to prove what you're holding,
say in the case of the brokerage's computer systems being taken down. They obviously must have well-protected
backups, but what if they were also somehow taken out? With my Japanese bank accounts I still at least have my passbook
that I can produce as proof I had a certain amount at the last time of its update, but with my brokerage I basically have nothing.
Is anyone taking and storing screenshots of their balances ?

[Kanto]

Many thanks to fools_gold, Kanto and mule96 for the replies so far, these
are very re-assuring. I wasn't aware that the same bank deposit protection scheme
protected these brokerage accounts as well, that is a nice insurance.

I guess if all goes well my holdings may end up exceeding the 10 million yen mark
in which case Kanto's suggestion of splitting the deposits according to the investment
wrapper they are in makes sense.
I guess the problem comes (if you are worried about such things) when your tokutei
account starts heading over 10 million yen since I guess there is little point in starting
two tokutei accounts with separate brokerages, since then you would not be fully offsetting your losses against your gains ?
(i.e. you could end up paying more tax than you needed to).

I suppose in those circumstances the better option if you were heading substantially above the 10 million threshold
(if you still wished to split across a few brokerages- and mule96's comments describing how it shouldn't be particularly close to a total loss
seem to reduce the need for this somewhat) would be to instead start using the ippan accounts and go through the
tax submission procedures.

One final related thought (I probably worry too much about these things I know!), but is anyone worried
about the fact that with these online brokerages there is not so much in your hand to prove what you're holding,
say in the case of the brokerage's computer systems being taken down. They obviously must have well-protected
backups, but what if they were also somehow taken out? With my Japanese bank accounts I still at least have my passbook
that I can produce as proof I had a certain amount at the last time of its update, but with my brokerage I basically have nothing.
Is anyone taking and storing screenshots of their balances ?

Honestly, no.

However, Rakuten supports .csv downloads for some data I believe. It would not hurt to check and archive regularly.

[fools_gold]

By law securities companies are required to register their customers holdings in a central database to help return assets in the event of bankruptcy.

[tokyojoe]

By law securities companies are required to register their customers holdings in a central database to help return assets in the event of bankruptcy.

This is again very re-assuring - I think I will be able to sleep at night from hereon!
Many thanks again for these clarifications.

[adamu]

For SBI, at least, they attach PDFs for all your trades, and also periodic balance and transaction reports.

It's called the 電子交付サービス（電子交付書面閲覧サービス）

https://www.sbisec.co.jp/ETGate/WPLETmg ... ostub.html

[fools_gold]

Just like the proverbial bad penny it looks like Mr. Woodford is back again. https://www.bbc.co.uk/news/business-56073429