Asia ex-Japan’s asset management industry is forecast to near double to around $4 trillion in AUM by 2015 and eventually become the world’s largest.

While not significant globally – Australia’s pension fund industry alone is worth $1.3 trillion – demographic factors and a burgeoning emerging middle class will be the drivers, finds research firm Cerulli in a report on asset management trends commissioned by Citi and Mirae Asset.

The composition of the Asian asset base is about half mutual funds and half institutional at present. But while volumes have almost doubled since 2006 to $1.17 trillion, this was due to performance-related asset growth.

Net new inflows into mutual funds were negative in 2009 and 2010, and mutual fund assets now make up 8% of household wealth, compared with 14% in 2007.

Cerulli raises the prospect that the availability of alternatives to mutual funds, such as exchange-traded funds (ETFs), are beginning to have an effect.

ETF assets under management in Asia-Pacific (ex-Japan) hit $59.8 billion by April this year across 250 products (excluding exchange-traded products).

Hong Kong is by far the biggest market with 83 listings from 13 providers and $28 billion in AUM. Cerulli also notes that China and South Korea have ETF markets that are increasing in size.

Stewart Aldcroft, senior adviser for securities and fund services within Citi’s Global Transaction Services business, points out that the Chinese government is keen on ETFs and suggests that if this is followed through the growth could be considerable.

“One of the things that I think will become evident is that ETF growth is going to be client-driven,” he tells AsianInvestor. “It will be more a case of the end-investor wanting to get into these products because they are fed up with being dumped with heavily loaded product that does not deliver.”

Cerulli notes that a rise in ETFs would have an interesting knock-on effect on distribution patterns, given that they are not generally distributed by banks – which continue to dominate distribution – but by brokers (as there is no commission involved).

The low cost of entry into ETFs will be a significant driver, argues Aldcroft. He also points to the potential global impact of a recent directive by the EU’s Markets in Financial Instruments Directive (Mifid) to introduce a ban on commission for independent advisers. “This is where client-led change has potential to go,” he adds.

He believes tactical trading in ETFs will become more common among institutional, high-net-worth and retail investors, particularly in a highly volatile environment such as now, and suggests this is an area that is perhaps under-exploited by banks.

The question of synthetic ETFs, though, is more controversial and Aldcroft believes it is incumbent on regulators to work together and agree something they feel comfortable with.

He notes that Ucits III funds account for 80% or more of product sales in Hong Kong, Singapore and Taiwan, but points to a market perception that the incoming Ucits IV structure is a bit too far forward for many Asian regulators because of its broader allowance on derivatives.

The growth in ETFs will be strong, he suggests, but not on the synthetics side.

When deciding which Asian markets to expand in, all asset managers quizzed in the survey pointed to future growth potential as the key consideration. Next were clients’ willingness to use foreign managers, a hospitable regulatory environment and market size. Asset persistency and product mix garnered the least responses.

Their greatest headache in setting up was acute differences from one market to the next, along with regulatory hurdles of accessing markets.

But the lack of independent advice-based distribution did not appear to concern managers, with Cerulli saying they tend to accept this as a fact of life.

The research firm found that success in expansion terms was more about asset growth than profitability, with 62% of Asian managers seeing the grab for assets as the main game.

Aldcroft believes regional expansion will primarily be driven by China, and he is anticipating a rapid acceleration of qualified foreign institutional investor access.

“I think the theory that Chinese fund managers will be the only managers of Chinese equities is probably wrong,” he adds. “But they will be the manager of choice for Chinese investors of international equities. That is potentially where there will be even more growth in the future.”

He reckons domestic products will dominate growth in China, Korea and elsewhere in Asia, including Thailand and Indonesia, even though he notes there are few international fund houses in both of the latter two locations.

He sees future growth in savings plan vehicles, which are traditionally the preserve of insurers. “That is why you will see insurance companies being really proactive in these places.”

He also notes that insurers are increasingly externalising and using third-party fund managers for their insurance vehicles. “We are seeing quite a bit of that, and can expect to see more of that from Chinese insurance companies.”

To compile its report Cerulli interviewed 30 Asia-based local and international asset managers over a six-week period in April and May, representing 32% of assets under management in the region. The questions for this report were prepared by the report’s sponsors.