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Opportunities abound in Asia for fund companies
ASSET managers launched more funds in Asia (1,490 funds) than Europe (1,279 funds) in the first eight months of 2013. But assets under management in Asia remain well below that in Europe. Put into context, the European mutual fund industry at US$7.2 trillion is about three times the size of that in Asia, at US$2.5 trillion as at Q3 2013.
Still, many opportunities exist for asset managers seeking to make inroads in the region, particularly for firms who prioritise asset retention and smart product development strategies, and which can expand in the region's growing retirement channels.
In Asia, asset retention, or the lack thereof, is a serious issue, even in more developed markets such as Japan, where mutual funds are currently bought based on the most attractive regular income features.
On average, funds are held for less than a year. In Taiwan, retail investors hold their funds for about six to nine months, and it can be as brief as one month in China. Chinese fund assets across all fund types are lower than what industry firms raised during initial public offer (IPO) periods since 2010, and managers with scale and distribution support maintain an advantage.
The largest 10 fund management companies introduced an average of 4.5 funds in the first half of 2013 compared with 0.6 by the bottom 10.
Asset managers may look guilty as charged, but the distribution landscape plays a big role here. With front-end fees averaging 3 per cent, distributors have a strong incentive to encourage the churning of funds. Further, fund firms have set their sights on high net worth investors, indicated as their most preferred target client segment in a recent Cerulli Associates survey. However, mutual funds are not necessarily the beneficiaries of growing wealth in the region.
Mutual fund penetration as a percentage of household financial assets has fallen across the region between 2007 and 2012. The most acute drop was seen in China, from 16 per cent to 6.5 per cent. Fund investments are often seen as transactional tools, as investors turn to real estate, direct stocks or even cash as preferred holdings in their portfolios.
For asset managers to explore the full potential of Asia's retail opportunities, fund retention needs to be viewed as important as fund-raising. Short-term easy wins need to be balanced with a more strategic "in for the long haul" game plan.
Fund launches ought to be more stringently controlled by committees which evaluate fund launch decisions on a multitude of factors ranging from existing market competition to internal competition as well as the longevity of fund demand.
Asset managers should also look to better tap the retirement savings pot. It is another way to improve asset retention rates, as demonstrated by more mature markets such as the United States and Australia. A rapidly greying Asian population will make retirement savings the prized bull.
Cerulli conservatively estimates that Asia ex-Japan pension assets will reach US$2.5 trillion by 2017, more than double 2011's US$1.2 trillion. Adding Australia and Japan to the mix, the figure swells to US$4.7 trillion. This does not include burgeoning tax-incentivised saving schemes such as the Nippon Individual Savings Account (NISA) in Japan, provident funds in Thailand, or the recently proposed 401(k)-style pension schemes in China. On top of that, there are the stickier assets from the insurance channel.
For Asian investors to start viewing mutual funds as long-term investments will take time, possibly generations. But there are signs of change.
More fee-based distribution models have been discussed and launched. Early adopters include online platforms such as iFAst Financial and Fidelity's FundsNetwork. Taking a leaf from their European peers, Asian regulators from Singapore to China are looking at measures to improve investor protection. Fund houses such as JP Morgan Asset Management and BlackRock have also planned or started streamlining their fund suites in 2013, culling hundreds of funds.
Distributors have also stepped up to the plate. For example, Nomura Securities, one of the most dominant distributors of mutual funds in Japan, has recently set up a product suite comprised of only funds with strong track records. Response has been positive, and this has set the right tone for the industry.
It is a tall order to tackle the issue of stickiness of assets, but it helps to make small steps in the right direction.
The writer is the Asia research director at Cerulli Associates