AsianInvestor Magazine

Issue: March 2010

Retail advisory redux
In September 2009, AsianInvestor's cover story exhorted regulators in East Asia to take seriously a dramatic restructuring of how mutual funds and other investment products are sold.

Our argument, printed on the cover, was that "Retail will pay for advice" ... "If that's what we really want." To which, fund-management company executives have said to me, "Really?"

We concluded our argument by looking at India, where Sebi had just introduced a bold reform by abolishing front-end loads and forcing distributors to charge clients a fee for their services.

"For those in the industry who claim they want to see investors play for advice and not just for products, it's time to become a cheerleader for what Sebi is attempting," we argued.

This month's cover story takes a look at what Sebi has done and the impact on the sale of investment products in India.

At first glance, our September thesis isn't holding up well. Distributors have reacted to Sebi's decree by simply not selling mutual funds. They can sell unit-linked insurance products instead and still get paid by the manufacturer up front.

Our story documents the extent to which this has been a disaster for the funds industry in the short run, and detrimental to consumers as well.

Take a step back and look again. Sebi is attempting to fundamentally transform its assetmanagement sector. It is hamstrung by India's convoluted regulatory mire, which silos mutual funds from insurance, pensions and broking. This creates regulatory arbitrage, and at some point the Ministry of Finance will have to consolidate these functions, to enable the development of a true investment-management culture.

In the meantime, however, India's different regulators are all working to develop their respective industries in a way that promotes transparency, empowers consumers, and deepens penetration among hundreds of millions of people. Individually these are small-fry investors (or as AsianInvestor dubs them, 'nano' investors) but as a group have the potential for scale. This is ultimately going to be good for providers.

The second half of 2009 was a black hole for funds but there are signs the situation is improving, with January seeing the industry record net inflows again. Much of the lack of sales last year can be attributed to people selling into a rising market to escape loss-making investments; or to reasonable concerns that the local stock market was too hot.

Today mutual funds account for a meagre 4% of household assets. But India's youthful demographics and the continued rise of an urban middle class means it is only at the beginning of a potential surge in demand for investment products. It is best to restructure distribution now to favour a more transparent, advice-based approach, while the market is young and habits are malleable.

India never offers a clear and straight path. It is beset by problems, such as the regulatory duplication mentioned above. Another is the need to offer a cost-effective means of educating lots and lots of poor people who have no financial literacy and who can contribute only tiny amounts. Growth here is therefore unlikely to mirror the spectacular example of China’s mutual-funds market.

But it is telling that the China Securities Regulatory Commission is also determined to restructure how products are sold there. In some ways the CSRC will have the harder task; it may have started too late.

It's too early to know for sure that Sebi’s reforms will succeed. India's handling of its New Pension System so far looks to be a failure. Pension reform was predicated on the need to achieve high volumes for razor-thin margins that make pensions accessible to the general population, but without sufficient incentives the whole project seems to have gone nowhere.

A similar fate could befall mutual funds, but this seems unlikely, as the industry is sufficiently established. Indeed, more foreigners are entering the market, in order to position themselves to catch the coming wave of nano fund investing. India is not often touted as a role model for East Asia, but if it gets this right, its consumer-first approach to distribution should be.

Jame DiBiasio
Editor

REGULARS
4 Up front
Taiwan’s LPF seeks second opinion; Korean corporate pensions surge; T. Rowe Price’s new UTI stake

10 Up front: on the move
Julie Koo leaves Fidelity for HSBC; ING Investment Management promotes Pranay Gupta

11 Operations manager
Philip Tye, DragonBack Capital

12 Regulatory roundup
Japan eases overseas investor taxes; India scraps benefits to money-market funds

14 Fund flows
Asians raise exposure to equities

16 Q&A
Mark Delaney, AustralianSuper

FEATURES
18 The limits to choice
Australia's superannuation system is revisiting the extent to which pension-scheme members can take control of their investments

22 Politics driving global equities in 2010
Global equity managers in London sound concerns over unemployment and prospects for government stimulus withdrawals

24 India's nano funds
Sebi is on a mission to empower investors and develop a consumer-oriented, transparent funds industry, but distribution has ground to a halt

30 Playing for silver in Japanese custody
Regulators have changed gears and are working to develop a level playing field for global custodians and fund administrators, but market share remains elusive

34 Chinese high-wire act for the 'old-10' fund houses
It has been a given in China's funds industry that the original 10 houses have always been the industry's winners. That may change

38 The RMB appreciation society
Both Chinese and global investors can benefit as China allows its currency to resume its rise against the US dollar

40 Asian investors not yet converted
The Asian convertible-bond market is still struggling to attract interest from new types of investors, despite a strong performance last year

ROUNDTABLE
44 The hard work of funds of funds
Four Asia-based executives at funds of hedge funds discuss their industry's fallout from the financial crisis, the new competitive landscape and how to avoid future Bernie Madoffs

ALTERNATIVE INVESTOR
42 China's happy hour
Hedge-fund managers seem confident that China's 2009 stimulus policies will not create undue volatility in their portfolios this year

48 Alternative Q&A
Jeffrey Kung and Peter Phillips, Frontier Asia Capital

50 Alternative roundup
Temasek sets up giant hedge-fund investment unit; Atom gets ready for spring debut in Japan; Income Partners' new special-situations strategy

About AsianInvestor magazine

AsianInvestor is a monthly magazine dedicated to the asset-management industry in Asia Pacific, from Tokyo to Dubai. The people who read us, and the industries we write about, include:

Institutional investors, such as sovereign wealth funds, pension funds, insurance companies, endowments and family offices – any asset pool indigenous to the region;

Distributors of investment product, including consumer banks, securities brokers, insurance companies, IFAs and private banks;

Investment managers, both global and local, including long-only, alternative investors and structured solutions providers; we cover the front office, portfolio management, trading, and middle- and back-office functions;

Service providers to the above, including securities brokers, prime brokers, custodian banks, lawyers, accountants, auditors, index providers and technology vendors; and Regulators.

Our regular features include:

Up Front. Industry news, people moves, new products.
Regulatory Roundup. Latest regulatory and legal issues from around the region.
Q&A. Interviews with institutional investors and regulators.
Fund Flows. Data from Strategic Insight on Asian funds.
Country Reports. The retail and institutional businesses in one market, including pension reform updates, offshore investment trends, distribution issues, regulatory events and competitive moves.
Asset Class Reports. Extensive interviews with portfolio managers, strategists and economists to understand the risk and reward characteristics of a particular asset class, whether liquid or illiquid.
Other features. These cover trends relating to institutions, insurers, fund managers, service providers.
Alternative Investor. A separate section of the magazine dedicated to alternative investments. Includes Alternative Roundup, for the latest comings and goings in the hedge-fund industry, and Alternative Q&A with a hedge-fund manager.

Our special features and supplements include:

The AsianInvestor 200. The AI-200 ranks Asia ex-Japan's institutional investors by assets under management. Unique proprietary research.
Ranking global and local fund managers by Asia-Pacific sourced AUM.
Rankings of the most influential people in the industry.
Supplements on hedge funds, ETFs and indices, securities services, electronic trading and pensions.

Annual awards include:

	AsianInvestor's Investment Awards. Announced online in April and published in June.

	AsianInvestor's Service Provider Awards. Announced online in September and published in November.

February 2010	December 2009
November 2009	October 2009
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