Although Japan's retail fund investors are showing signs of life, and institutional business remains steady, the best way to grow business for active fund managers may be overseas -- which implies not only selling more product to global investors, but considering mergers or acquisitions.

That is the conclusion of Nobuaki Omura, president and CEO at Daiwa SB Investments, a $40 billion asset management company with both institutional and retail businesses. (Retail accounts for about 24% of AUM but closer to half of firm revenue.)

Omura realises the firm's competitive advantage remains in Japanese equities, for both its local and foreign institutional clients. "Compared with the big global asset managers, we are considered more of a regional manager," he notes.

Demand among retail investors, however, has been for foreign currencies and foreign securities. Meanwhile the domestic base of corporate pension funds has shrunk and many institutions have shifted assets to passive managers, in the wake of the past year's market turmoil.

Omura has seen his fair share of economic and market crises, not least the bursting of the Japanese bubble after 1989, when he was an investment banker. So he is sanguine about the current situation, noting that Japan's investors are returning to the marketplace.

But the question of how to position the firm in the post-credit crunch era is a new challenge. "The global market is changing, as is the Japanese market," Omura says. "Japanese investors are changing their habits; foreign appetite for Japanese securities has changed. We need to ask ourselves, 'Where is the Japanese growth story? How attractive is this market to be in?'"

Right now the firm has not made aggressive moves. Its team-based, process-driven investment style does not allow for the hiring of star managers or quick transformations. The firm has added to its marketing team in London, and Omura says this year Daiwa SBI has won mandates from European and American institutions, including corporate pension plans, which compensates for the shrinkage in the Japanese institutional space.

He believes the firm will need to take a look at ways to grow its global footprint, which should include considering mergers or acquisitions abroad. Any such plan would require the blessing of Daiwa SBI's shareholders -- the principal ones are Daiwa Securities and Sumitomo Mitsui Financial Group, which own 44% each, with another 10% held by T. Rowe Price of the United States.

Over the medium term, Omura is confident that active managers in Japan have a positive future. The past year has seen the investment-advisory business lose out to trust banks and other providers of passive investments, such as Barclays Global Investors, while the retail investment landscape has been mostly about high-risk plays such as high-yield and emerging-market debt funds. But with vast sums tied up in bank deposits, Omura believes the funds industry generally has loads of potential. Winning that business, however, may not be possible for asset managers that do not adapt to bigger changes sweeping the industry.