Fund firms eye private banks, insurance platforms

Mutual fund managers, facing asset retention issues, are increasingly turning to private bank and insurers for distribution, says Cerulli, but fierce competition will keep the shift gradual.
Fund firms eye private banks, insurance platforms

Asia-Pacific mutual fund firms, in search of more stable revenue streams, are increasingly trying to get their products on private bank and insurance distribution platforms, but the shift will be gradual, says research house Cerulli Associates.

Mutual funds on traditional bank platforms in the region have issues retaining assets, as Asian investors tend to have short-term investment holding periods, notes Cerulli. This is a particular concern for fund houses in China, Korea and Taiwan. In Korea, for example, 87 onshore equity funds launched in 2010, yet by the end of 2012, only 77 of them remained.

“Retail distribution tends to be quite volatile,” says Ken Yap, head of Asia-Pacific research at Cerulli in Singapore. “There seems to be some confusion on investors’ part, who think investment and trading are the same thing. This leads to high churning of these investment products, which is not something distributors or fund managers particularly like.”

Moreover, there is an increasing amount of regulation imposed on mutual fund firms looking to sell to the retail market, which is both burdensome and time-consuming, Yap tells AsianInvestor. “Funds sold to mass retail investors post-2008 continue to be closely scrutinised by some Asian regulators and can take a long time to receive approval”.

As such, regional mutual funds are turning to private banks’ and insurance companies’ distribution platforms, he says.

According to Cerulli research, private banks and insurers rank second and fourth, respectively, as the channels fund companies want to tap into the most over the next three years.

Insurance distribution, which provides “stickier flows through investment-linked products”, is one obvious solution to the asset retention problem. “If funds are able to get onto an insurance platform, they have entirely different dynamics altogether,” Yap says. “The business is much more consistent than [traditional] distribution channels.”

Private banking channels, meanwhile, offer mutual fund firms the chance to offer innovative, higher-risk-type strategies more easily.

“The cost of distribution for more sophisticated products to retail [clients] is higher, so distributors are more reluctant to take on products that aren’t plain-vanilla,” Yap says, noting that such higher-risk products often come under more intense regulatory scrutiny as well. “This doesn’t apply to private banking clients, who are generally in the higher wealth tier and therefore more open to taking more risk."

As a result, it makes sense for managers with innovative products to look at using private bank channels, he adds.

That said, this situation may change in Hong Kong, since the city’s securities regulator is consulting on proposals to start treating wealthy individuals as retail investors.

And in any case, getting onto these distribution platforms isn’t easy – apart from for a small select group of managers – and, as such, the shift will be gradual, notes Cerulli. 

Yap was unable to provide a percentage split for how many mutual funds are on retail bank distribution platforms versus private banks or insurance platforms, but he says the vast majority are on bank platforms for retail clients.

Net inflows into Asia-Pacific mutual funds totalled $100 billion in 2012, a marked improvement over the $16 billion in 2011 and a reversal from the redemptions of $45.9 billion in 2010 and $5.1 billion in 2009.

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