Research house Cerulli Associates has forecast a 67% rise in mutual fund assets under management across Asia ex-Japan to $1.9 trillion by 2017, equating to average annual growth of around 13%.

It comes after a stark revival in fortunes for the industry, with Cerulli data showing that the region’s mutual fund AUM grew 20% last year to $1.14 trillion, a record high. That was a sharp reversal of a declining trend from $1.05 trillion in 2009 to $942 billion in 2011.

Ken Yap, Singapore-based director at Cerulli, points to 2012 as a breakthrough year for the industry, which saw a doubling of historical annual growth rates of around 10%. “However, growth of 20% is not sustainable in the long term,” he tells AsianInvestor. “We forecast [AUM] will hit $1.9 trillion by 2017.”

Last year’s growth in mutual fund assets was led by Hong Kong, where they rose 34% year-on-year to $92.6 billion, well above its average CAGR of 23% over the past four years.

“Hong Kong is clearly the pick in terms of growth rates, with many funds oversubscribed last year,” notes Yap. “China was more rightsizing, but it clearly can go a lot further.”

In terms of growth, Hong Kong was followed by China, where AUM grew 28% last year to $427.8 billion (by far the region’s largest single market); India (+24.3% to $135 billion); Taiwan (+15% to $146.5 billion); Singapore (+11% to $52 billion); and Korea (+10.4% to $282.4 billion).

In terms of flows, fixed income funds were the clear winners in 2012, with $70.2 billion in inflows, followed by money market products with $46.8 billion and others (including guaranteed, real estate, derivatives and index funds) with $11.1 billion.

At the other end of the scale, equity funds saw $26.5 billion in outflows, while balanced products saw net redemptions of $1.5 billion. That still means that the industry saw more than $100 billion in inflows last year in total. The proportion of equity funds in overall industry AUM has now sunk 12 percentage points to 35.8%, while fixed income funds have risen almost eight points to 25.3%.

“If these rates continue, equity and bond funds will have the same market share within a few years,” muses Yap. “However, we do not think that is going to happen.”

While he does not back the ‘great rotation’ concept – “we have not seen any significant inflows into equity funds just yet” – he does believe equities will recover.

Another Cerulli chart shows that 90% of fund assets are in domestic products, although this excludes Hong Kong. Adding the offshore-product-heavy SAR territory, the percentage drops to around 83%. However, he suggests the pending cross-border funds initiative between Hong Kong and China could be a “game-changer”.

Yap points out that while offshore funds are growing in Taiwan and Singapore, they are declining in Korea. He says this trend will only change if regulatory barriers in China, India and Korea can be overcome.

While the Cerulli data shows mutual fund penetration as a percentage of household financial assets has fallen to 7% across the region, that was at the end of 2011.

With a 20% rise in assets for 2012, he notes, that figure should rise back to the 9-10% range.

While mutual fund penetration in the US is as high as 30%, adds Yap, if you take out retirement contributions, that falls to 15-16%, indicating the two markets are in fact moving closer to one another.

In terms of distribution channels, banks have remained consistently dominant with around 60% market share, followed by securities companies (17.6%), direct (11.1%), IFAs (8.2%) and insurers (3.9%).

Interestingly, of the banks’ 60% share, private banks now make up around 5%, meaning they now account for 3-3.5% of overall industry distribution, so they are fast closing in on insurers.

Indeed, Franklin Templeton’s own sales in Singapore, for example, also indicate private bank sales of mutual funds are rising. Some five years ago private banks accounted for 10% or less of its sales in the Lion City; that figure is now around 60%.