The mutual funds industry in Asia, now totalling $1.5 trillion, will reach somewhere between $3.5 trillion and $8 trillion in the next five years, predicts New York-based consultancy Strategic Insight. Those figures include Japan but exclude Australia and New Zealand.

Net flows to mutual funds in Asia are now running at an annual pace of $450 billion, a figure that has the potential to rise to $1 trillion in 2012, the company says. That includes offshore funds sold into local markets.

This is in stark contrast to Europe, where the industry experienced net outflows of Ç120 billion ($176 billion) in August and September, and were only a minority of asset management companies now experience net inflows. Not counting money market funds, the European funds industry is on track to experience inflows of Ç30 billion this year. And that doesnÆt account for an outflow of Ç50 billion from Europeans into Asia-focused investments.

The enormous US funds industry continues to enjoy growth, with total inflows year to date of Ç462 billion ($678 billion).

Strategic Insight, which has been tracking the funds industry worldwide since the 1980s, has just released a rare, comprehensive report on the Asian funds industry in response to client demand. ôThe tremendous growth in Asian assets and the volume of business has led to requests from clients for us to put together our thoughts on the industry,ö says Jag Alexeyev, director of global research.

Strategic Insight takes public data on funds and analyses it on behalf of clients in the money management industry. ôThere is more and better data on the Asian funds industry now,ö Alexeyev says. He and his colleague Daniel Enskat, managing director for global research, recently visited Beijing, Hong Kong and Tokyo, in part to determine whether the firm should open a research office in the region, as well as to promote the report. Their analysis also included the Middle East for the first time.

The headline figure of $8 trillion in five years was arrived at by assuming inflows increasing by $150 billion each year, and 12% equity market returns annualised. But Enskat says that the industry will more than double in size even if market returns prove flat and inflows are halved.

Enskat suggests the $8 trillion number may in fact be conservative. Current inflows are mostly retail and the institutional market has yet to realise its potential. Smaller markets are also growing quickly: Southeast Asian fund markets are growing 50% faster than last year. Japan is still at the beginning of seeing its huge deposit base switch into investments, but has already put $100 billion in the hands of foreign fund managers. ôAnd ChinaÆs market has generated $75 billion of inflows year to date,ö he says.

Despite the heady growth experienced in the past few years, Asia now presents a conundrum to many global asset managers. ôAfter the run-up in these markets, itÆs natural to ask whether now is the right time to expand in Asia and be optimistic,ö Alexeyev says. ôBut at the same time, executives also face a risk of underestimating AsiaÆs growth.ö

He cites common expectations held only one or two years ago that ChinaÆs domestic industry would take several years to cross the $1 billion mark; this year it surged past $3 billion.