A convergence of market circumstance has led to an inflection point in terms of mutual fund penetration in Asia this year, suggests Aberdeen Asset Management.

Distortions in global bond markets, combined with a re-examination of absolute return strategies and sanctions under Ucits V, have driven investors to look at mutual fund products from a different perspective, the firm notes.

Data from Strategic Insight appears to back up this assertion, although not across all markets. There has been $85.5 billion in sales of locally domiciled funds across Asia-Pacific to date this year, less than 0.5% down on the whole of last year but three times more than in 2010.

The strongest year-on-year increases have come in China, Korea and Thailand, and the strongest declines in Japan, India and Indonesia (small base).

“Some houses are champions of what they see as the next big development, which is a risk-driven approach to funds rather than one based on presumed asset-class returns,” says Patrick Corfe, marketing director at Aberdeen AM. “Where it goes from here is questionable.”

But the thinking is that the future looks more promising than the recent past. Amelie Remond, head of private bank sales for Hong Kong and Singapore at Aberdeen AM, talks of two phases post-crisis: 2008-09, when fund penetration dipped alarmingly as everyone cut positions, and 2010-11, where firms were forced to adjust to the cost of rising regulation and compliance.

“Now we are trying collectively to restore that,” says Remond. “All private banks have come round to mutual funds as an investment proposition. Especially this year I think we see an inflection point in mutual fund penetration compared with three or four years ago.”

The role that funds play in private client portfolios was discussed at AsianInvestor’s private banking roundtable, sponsored by Aberdeen Asset Management, which has a dedicated sales force for private banks in Asia. The roundtable appears in our December magazine, but you can view it in full on this PDF, or via our e-magazine, now available on our website.

AsianInvestor interviewed Remond to get an asset manager’s perspective on the roundtable, which she sat in as a silent observer. Participants in the debate had suggested their clients’ investment into mutual funds had been consistent, although they had seen increased rotation into fixed income funds, partly owing to difficulty of access.

But one thing that emerged strongly from the roundtable was that the relationship between private banks and asset managers is an improving one. Most banks have moved to a guided architecture approach in which they engage fewer fund houses, but work with them more closely.

“I spend three times as much time with asset managers working on product development, identifying and communicating what we are trying to achieve for clients,” said Roger Bacon, head of managed investments for Asia-Pacific at Citi Private Bank.

Remond sees closer working ties between private banks and asset managers as a positive development (which is not necessarily what some of the smaller fund houses might say).

She agrees that the industry needs to work together on more of a solutions-driven approach, and suggests that Aberdeen may seek to work with private banks on more of a segregated account basis, and even on co-mandates with other managers.

“These would be strategies that are not open to the public,” she says. “We don’t do that yet because the market in Asia is still pretty young. It is one of the things we need to think about. In five years time the market will be more mature.”

The suggestion from roundtable participants was that they would like to see asset managers focus on core capabilities, on the understanding there is too much undifferentiated product already.

At the same time, Rene Buehlmann, global head of investment funds at UBS Wealth Management, said he wanted fund houses to share their best forward-looking research and ideas.

That is not necessarily a contradictory stance, as it was not said in the context of manufacturing more product. But there is a potential conflict there.

“My guess would be that banks would use their internal asset manager to generate ideas,” says Remond. “For external managers, I believe they prefer us to be dogmatic and stick to what we know we do well.”

She adds that she is seeing more institutional investors putting money into mutual funds, including retail funds.

“You need $100 million to open a segregated account,” notes Corfe. “You might be more comfortable putting, say, $20 million into a China strategy via a pooled product. We have the ability to segment in terms of the service we offer, such as access to managers and reporting. So it makes a lot more sense for both sides, frankly.”

On the question of what best-in-class really means for manager selection, roundtable participants agreed that while performance was key, consistency and stability were at least equally, or in many cases more, important. This is where there is a potential mismatch in terms of investor expectations, suggests Corfe.

Remond notes that communication and transparency on the manager side is essential, too. “There is a need to be proactive in our engagement with distributors and not to wait for requests for information, especially for private banks because they have a nervous set of clients on their backs,” she says. “This points to the importance of the long-term relationship as well.”