Triple-decker funds seem to have replaced double-deckers in Japanese affections, even though they tend to offer lower dividends, according to Cerulli Associates. But this too may prove a relatively short-lived infatuation, argues the research house.

Total AUM in triple-deckers jumped eightfold last year with total assets rising Y692 billion to Y891.9 billion, while flows into double-deckers turned negative (with Y213.7 billion in outflows) after three years of rising AUM. That said, double-decker AUM still rose last year to Y10.4 trillion from Y8.6 trillion in 2011.

It was equity and allocation type of double-deckers that saw heavy net redemptions last year, while the fixed income fund flows remained positive. Tightened regulations and lower dividend payouts were the major cause of the outflows, says Cerulli, and it will be hard for double-deckers to again reach the net flow levels seen in 2009–2011.

Yet the firm sees the same pressures as likely to weigh on triple-deckers, suggesting that dividend uncertainty will crimp flows to both types of funds this year. That said, the impact “could be mitigated somewhat by investors’ appetite for the returns that these complex structures can potentially offer”.

In addition to investing in equities, fixed income or alternative assets, double-deckers buy currencies with the aim of boosting returns. Triple-deckers add a third layer, such as a call option strategy, as a further kicker.

As of the end of 2012, 78.6% of double-decker fund assets were in fixed income, 10.9% in equities, with alternatives, convertible bonds and allocation-type funds account for a small proportion. Meanwhile, some 80% of triple-decker fund assets invest in global equities and global real estate investment trusts.

Japan’s Financial Services Agency became concerned last year that double-decker funds were often sold to less savvy investors who do not understand the risk associated with such products.

It was also concerned about distributors selling mutual funds that only focus on the amount of dividend that is paid, without stating its source and structure. There were cases where funds delivered dividends by eating into their principal.