The first of 2007 has seen mutual funds enjoy $215 billion of net inflows from Asian markets ex-Australia, led by Japan and China, according to Strategic Insight, a funds research firm based in New York.

That puts Asia on track to blow away last yearÆs record net funds inflow of $270 billion. Not only is this more than net gains in Europe, but it is composed of asset classes that generate higher fees than cash-obsessed Europe.

ôAsia is an increasing priority for top-tier global fund management companies,ö says Daniel Enskat, co-managing director at Strategic Insight. Most of these are American, and have been diversifying into Europe and Asia over the past several years.

ôLast year, funds gained greater net inflows from Asia than from Europe, and thatÆs continued this year,ö Enskat says. ôIt justifies the build-up that has been going on in Asia.ö

That $215 billion figure, based on strong inflows from Japan, China, Korea, India and Thailand, does not include Australia or Europe-based funds sold into Asia. If those are included, the net inflows reach $250 billion.

Jag Alexeyev, co-managing director at Strategic Insight, says Japan has become a major growth market for mutual fund companies. Funds of funds that provide local investors with diversified international income funds are leading the way. Pictet Asset Management has retained its position as the biggest fund in Japan, its global utilities fund adding $6 billion of net inflows so far this year on top of the $13 billion it achieved in 2006.

But the trend is epitomised more by local players such as Nomura Asset Management and Nikko Asset Management, which provide investors access to a range of international funds. Nomura has funds of funds such as its My Story series and its Global All Stars platform, while Nikko offers its World Series platform and its Three-Top fund of diversified bond managers. Inclusion in such platforms has helped firms such as Pimco become major players in Japan. Alexeyev says around 50% of flows to fund houses go to international firms via such platforms. More recently, he says, international ETFs have enjoyed a surge.

ChinaÆs story is more domestic, but that market has shrugged off problems in AmericaÆs housing market to breach first the RMB2 trillion and then the RMB3 trillion mark this year.

Real estate and infrastructure funds in Korea and Taiwan, as well as a range of equity and bond funds in India, and the renewed interest among Thai investors in diverse asset classes has channelled record amounts from these markets to fund houses.

Perhaps more importantly, the risk appetite among Asian investors is much higher than among Europeans. European funds enjoyed net inflows of $220 billion in the first half of 2007 û either a little higher or a bit below the Asian level, depending on how you classify it. But EuropeÆs total inflows have been in decline since 2005.

Some individual funds have been big gainers. JPMorgan and Highbridge, for example, have statistical market-neutral products that had accumulated up to $8 billion in June. But in the past few weeks, the NAV has fallen by 5% and the fund has suffered redemptions of around $2 billion.

But most investments in Asia are going to funds of equities, bonds, real estate, infrastructure or balanced mandates. In contrast, two-thirds of European net inflows have gone to money market funds or cash-enhanced funds. French and German investors had invested around $40 billion and $30 billion respectively into such strategies during the first half of this year.

Cash-plus funds have been badly hit by the current subprime crisis, however. The ôplusö often involved exposure to credit markets, which has forced these funds to close off redemptions and led to poor performance û creating an industry of money-market funds that are neither safe nor liquid. Absolute-return funds have also been popular in Europe and these are also now struggling to perform and being hit by redemptions, says Strategic Insight.

Will the subprime crisis derail the story? Last week saw most Asian equity markets suffer. Alexeyev says it is too early to tell, but he notes that during last springÆs big emerging-market equity correction, and during the February scare when ShanghaiÆs stock market plunged 9%, Asian investors remained committed; in fact, they increased their overseas exposure. European investors, on the other hand, were more likely to redeem or move into conservative positions.