The announcement that Shinsei Bank and Mellon Financial are establishing a joint venture investment advisory company to tackle the Japanese pension fund market should have competitors worried.

Shinsei, formerly Long-Term Credit Bank, is one of a handful of banks that were nationalized and then sold to foreign owners. It is not one of Japan's mega-banks but is the only large one to be foreign owned (by the consortium Ripplewood Holdings), ranked 20th in Japan in FinanceAsia's Top 200 Asian Banks survey (see our August edition). Thanks to this pedigree it is also the most commercially minded of the large banks, providing its shareholders a return on average assets of 0.71% last year, the highest margin by far; most competitors were in the red.

Mellon, meanwhile, claims to be the world's 14th-largest asset manager, with roughly $600 billion of assets under management, and the fourth-largest pensions provider in the United States. For the past five years it has had a retail presence in Tokyo, Mellon Global Investments Japan, which manages around $3 billion from five funds it markets through an alliance with Bank of Tokyo-Mitsubishi and distributed through its partner's brokerage arm, Kokusai Securities. (Mellon also has a footprint in Hong Kong through a 20% stake in Hamon Investments.)

Both sides point to the sheer size of Japan's pension market: Ñ270 trillion ($2.3 trillion), according to Cerulli Associates, of which investment advisory companies have only a 13.5% market share, with the rest managed by traditional relationships with insurance companies and trust banks. Poor results over the past several years have seen more assets shift to the fund companies, however, so it is generally seen as a growth market.

Although this is true, it is a story that has been told to global fund managers' head offices for a decade, to the chagrin of many. Japan is a fund management graveyard. Since the first signs of Big Bang deregulation emerged in the early 1990s, a horde of major global names has set up shop in Tokyo. Many formed joint ventures. Cerulli has reckoned two-thirds of these are now defunct.

Failures stemmed from foreigners' failure to appreciate the power of traditional relationships; from the instability of Japanese financial institutions; from local partners' desires for proprietary products; from cultural misunderstandings; and from the high costs of doing business in Japan.

Indeed, this last point plagues all players selling a non-yen products. Consultant George Curuby has described pension plan sponsors not as investors or savers, but as administrators: run by overly cautious men, often in sinecure, who don't want to rock the boat. Because offshore investments are riskier and a leap into the unknown, these caretakers demand a ridiculous amount of information, such as daily reporting and explanations about every investment move - resulting in tremendous costs to client servicing and operations that aren't found anywhere else.

There are reasons, however, to believe the Shinsei-Mellon deal could turn out differently. Both parties have a more cosmopolitan outlook. Mellon has not only been involved in Japan's retail market, but is also a member of the Ripplewood consortium and so knows Shinsei well. The bank, meanwhile, is comfortable working with Americans and is implementing best practices imported from the US.

"The management at Shinsei is not that of a traditional financial institution," says Henry æDoc' Miller, president of Mellon Global Investments Japan. "They are Japanese but they have a clearer understanding of Western business practices. We know the foibles of doing business in Japan and that is one reason why we partnered with a stable, growing bank."

Jun Daikuhara, corporate executive officer and general manager of Shinsei's asset management services division, says, "It is true that we have seen many JVs or foreign fund managers fail, and I think that was because their models were not cost-effective. They tried to build manufacturing out of Tokyo and hired local portfolio managers and traders. They never reached economies of scale. Our approach is to leave manufacturing to Mellon and its subsidiaries, and here just concentrate on sales and marketing, client service and operational support."

He adds he is aware of the problem of problematic clients that push up costs. "It is a legitimate point," he says. "We will try to standardize reporting. That's a challenging area."

Miller says the JV was never part of the parent company's original plan when it joined as a shareholder in Ripplewood Holdings. Ripplewood bought LTCB two years ago with the intent to restructure and sell it after a few years. That is still Ripplewood and Mellon Financial's intention.

But Mellon, keen to expand its retail asset management business to institutions, was also impressed with the speed of Shinsei's turnaround and noted it lacked a pensions business. LTCB had itself been a pensions player with Ñ1 trillion ($8 billion) under management, says Daikuhara, but sold off this business five years ago. Shinsei, however, retains relationships with many of those corporate clients.

The asset management JV - which lacks a name, pending final approval for the deal from the Financial Supervisory Agency - is a standalone investment for Mellon that will continue after Ripplewood sells Shinsei. Mellon and Shinsei both own 50% of the JV. Mellon will provide its global product capability in equities and fixed-income, both for active and indexed portfolios. Shinsei will review clients' needs from a Japanese point of view. "What we add is to come up with a way to package Mellon's expertise to meet client needs," says Daikuhara, "as well as our existing relationships."

Daikuhara is also encouraged by the success of other relatively new entrants that have been able to avoid others' mistakes. "This is a difficult market but others such as PIMCO have been able to grow rapidly," he says. "It gives us confidence that with good products and good service we can build a successful business."

He adds the JV, once approved, is likely to start with 10-15 employees. Daikuhara himself will remain at Shinsei, while Miller is being considered for the JV's chairman, but no decisions have been finalized. The company is likely to include a mix of Mellon and Shinsei people as well as new hires from outside.