Managers yet to adapt to harsher climate
With fund flows much lower than they used to be managers need to better accommodate the Asian investor’s mentality
After the impressive inflows from 2005 to 2007, the Asian mutual fund industry is at a crossroads, according to speakers at Fund Forum Asia in Hong Kong. The tightening of regulatory regimes, as a consequence of the financial crisis and Lehman mini bond scandal, has made fund distribution in Asia much tougher and fund flows are currently only a trickle of what they used to be.
There are key considerations of low retail fund penetration – just 5 per cent of household financial assets in the region, down from 7 per cent in 2007 and compared to 27 per cent in the US and 18 per cent in Europe – and very low fund persistency ratios, with Indonesia averaging 74 days. These drive Shiv Taneya, managing director at Cerulli Associates and a speaker at the event, to suggest that fund managers should think of drastically cutting their transaction fees and finally acknowledge the trading mentality of Asian investors. This may allow them to build the investment market to 20 times its current size.
Increased focus on suitability requirements has led banks to be more selective when choosing funds. Since 2009, Hang Seng Bank in Hong Kong has reduced the number of funds on its platform by as much as a quarter, to focus on simpler products with lower levels of risk, according to Andrew Fung, head of treasury and investment for the bank.
Products that are today rated as riskier, such as structured products or funds making limited use of derivatives, may alienate 80 per cent of the now risk-averse client base. Risk appetite has become a major factor for selection of products.
Bruno Lee, head of regional wealth management at HSBC, favours managers who show a long-term commitment to Asia, those who can really support branches’ sales advisers, and not those who just set up a shop with five people and then leave or fire staff at the first sign of trouble.
Thought leadership, marketing and information delivery have become crucial for intermediaries, according to Strategic Insight’s Daniel Enskat. Performance is not as important as relationship management, in a crisis. Those managers who have supported their clients best are those who have been creative, such as Templeton, which came up with a “metatrend” around equity and sells it in different small packages, or Pimco’s Bill Gross, who delivers his investment outlook through videos on Kindle, Facebook or Twitter.
Associated with good brand and performance, this proactive marketing service has led a handful of players to gain the most flows.
Blockbuster products and managers dominate global distribution where 95 per cent of total flows goes to 0.5 per cent of funds. In Asia, this may be even more extreme. Successful managers are, like Schroders, those able to implement an “intelligent product rotation strategy”, and switch from one key theme to another, depending on market environment and distributors’ needs. This approach pays off more than promoting many themes at the same time, as more money is going to fewer themes, according to Mr Enskat.
Although competition is increasing and profitability margins have decreased, managers who play their game well can still hope to get a share of the fastest growing mutual fund pie. According to Cerulli estimates, the Asian mutual fund assets will reach US$1,700bn by 2015, growing at a compound growth rate of 11 per cent in the next 5 years, with China continuing to be the largest market.
Elisa Trovato is deputy editor of PWM Asia
