The US credit crisis has been largely responsible for an unprecedented 12% decline in mutual fund assets in Asia, and because of this, fund houses operating in this region will be forced to revise previously tried and tested business strategies.

New strategies and measures will likely include a wider onshore and offshore product range across the risk spectrum, more diverse distribution channels and more selective but collaborative manager-distributor relationships.

ôAfter three years of explosive growth from which almost all fund managers benefited, we think this setback will force them to review their business strategies and institute measures that are more focused on retaining assets and margins, and reducing costs,ö says Shiv Taneja, London-based managing director at financial services research firm Cerulli Associates.

In the past, fund management firms in Asia capitalised on what many have referred to as an IPO-mentality when it comes to funds, or the tendency for retail investors to flock to the latest investment theme, strategy or product. It was common to see very similar fund launches from various fund houses in succession, with some examples over the years including guaranteed-type products or those that invest in Greater China, environment-related companies, or just before the current crisis, the Middle East and North Africa (Mena) region. The more the fund houses catered to this IPO-mentality, the more they earned in terms of fees.

This year, however, it was evident that retail investors in Asia were keeping their money close to their chest. While many stayed invested in the market sitting on their paper losses (for many, the realisation of just how bad the credit crisis was came when it was too late to pull out of the markets), most have avoided putting fresh capital to use.

Mutual fund assets under management in Asia ex-Japan fell by 12% to $991 billion in the first half of 2008 from $1.126 trillion in end-2007, according to Cerulli Associates. By the end of this year, AUM could be down 20% to $915 billion. The bulk of the asset shrinkage in Asia so far this year has been due to market performance rather than mutual fund redemptions.

Since redemptions are not largely responsible for the decline in AUM in Asia, Cerulli expects a recovery in the coming years. Strong economic and industry fundamentals are expected to lead to a resumption of regional asset growth over the next five years, albeit down from a 33% compound annual growth rate (CAGR) in the 2003-2007 period to 7% in the 2007-2012 period.

In its latest Asian Distribution Dynamics 2008 report, Cerulli forecasts that AsiaÆs mutual fund assets will reach $1.6 trillion by 2012. Korea and India, two countries where mutual fund savings programmes are widespread, are expected to have the strongest growth rates of 13% and 9%, respectively, from 2007 to 2012.

CerulliÆs report covers six key Asia ex-Japan markets: Korea, China, Hong Kong, Taiwan, India and Singapore. The report covers market-sizing, product development, distribution dynamics, and an analysis of industry revenues and costs.

Driven by market rallies, a high savings rate and expanding wealth management sector, mutual fund assets in Asia hit a peak of $1.126 trillion in end-2007, which was an 86% growth from 2006.China was the primary contributor to this growth, having almost tripled its assets in one year to $485 billion, but this was followed by a contraction of 34% in the first six month of 2008.

Proprietary surveys conducted by Cerulli suggest that local banksÆ market share of the AUM in Asia grew strongly in 2007, as a result of the rallies in stocks and an improvement in local banksÆ investment services and product choice. However, in the first half of 2008, foreign banks were able to recapture some of their market share by drawing on lessons learned from previous market crises, something local banks still have little experience with.

Onshore funds invested locally make up close to 80% of AsiaÆs total mutual fund assets. With ChinaÆs onshore market ramping up strongly in 2007, regional assets of domestically invested funds were able to register a CAGR of more than 30% from 2003 to 2007. Onshore funds invested overseas emerged in 2007 as the strongest product type, again fuelled by ChinaÆs Qualified Domestic Institutional Investor (QDII) scheme causing assets to multiply by more than five times from the previous year, albeit from a small base. Offshore fund assets grew by an impressive four-year CAGR of 29%, although they still account for less than 15% of AsiaÆs total.

Compared to a decade ago, foreign banks in Asia trail well behind their local counterparts, and now control less than one-tenth of the regionÆs mutual fund assets. Regionally, brokerages are the most important alternative to banks, although this is more pronounced in some countries than others. Having steadily undermined foreign banksÆ market share, especially over the past few years, the market share of local banks slipped in 2008. The private bank share of mutual fund assets has been very small. Although the data does not capture assets sourced from outside the region, Cerulli says private banks in Asia have largely side-stepped mutual funds in favour of more active trading tools. The other distribution channels, largely comprised of insurance companies, are the dark horse in this picture. Although its imprint on Asian distribution remains small, there are signs to suggest that this channel could triple in size in a few short years.

Managers in Asia have benefited both from the strong growth of assets, as well as the higher margins arising from the shift toward an equity-overweight asset allocation. Over the past four years, total manager revenues from retail mutual funds have grown by a CAGR of 32%, ahead of asset growth rates. Cerulli forecasts a five-year CAGR for retail revenue of 9.2% by 2012, significantly below the rates seen in the previous few years, but outstripping asset growth rates by close to 2%, as retail investorsÆ allocations towards equity and theme funds continue to move up, albeit more slowly than before.

Following are the country-specific findings in CerulliÆs Asian Distribution Dynamics 2008 report:

In Hong Kong, the fund industry registered a 49% growth in AUM in 2007. Based on CerulliÆs estimates, mutual fund assets attributable to Hong Kong residents in end-2007 stood at HK$548 billion ($70 billion). However, such high growth rates are unlikely to be repeated in the near future. As in much of the region, Hong Kong investors are standing on the sidelines, and Cerulli estimates that the impact of falling markets will cause mutual fund assets to shrink to HK$527 billion by June 2008. ChinaÆs spectacular rise in 2007 helped to fuel Hong KongÆs growth, so it is no great surprise that the Chinese stock market plunge has had an adverse impact on the territory. This said, Hong Kong investors are relatively well-diversified across geographies, asset classes, and currencies, and the projected asset fall here is significantly lower than that in China.

Buoyed by stellar stock market performances across the region, SingaporeÆs fund industry recorded an AUM growth of 30% in 2007, a five-year high and surprisingly robust given the relative maturity of the market. Strong inflows and market appreciation were the twin drivers of asset growth, with net inflows accounting for about 62% of growth and a rising stock market accounting for the remaining 38%. SingaporeÆs mutual fund market is one of the least volatile in the region. The conservative nature of Singapore investors, coupled with relatively good financial planning services from a large range of local, foreign, and private banks, has resulted in lower asset turnover rates in Singapore than other Asian countries, including Hong Kong. Asset growth can therefore be expected to remain relatively stable, although lackluster compared with the developing markets in Asia.

After two straight years of asset growth at a CAGR of 17.5%, supported largely by the boom in cross-border funds, the Taiwanese mutual fund industry saw a decline in the first half of 2008. This decline was the result of market falls rather than redemptions, and therefore was not as severe as might be expected, especially when compared to some other Asian markets. The onshore mutual fund marketplace, in particular, managed to retain its assets despite volatile market conditions. Onshore assets reached a high of NT$2.0 trillion ($64.7 billion) in April 2008 due to NT$30 billion of net inflows from local equity funds in anticipation of the new presidentÆs inauguration in May 2008. Both the onshore and offshore segments stand to benefit from the liberalisation of Chinese-directed investments. However, a return to political tensions between Taiwan and China, or a sustained weakness of Chinese stocks, could damage already raised expectations and cause the floodgates to open.

In contrast to virtually all of its Asian neighbours, Korea managed to increase its mutual fund assets by 20% in the first six months of 2008, almost equivalent to its full-year growth in 2007. This growth was sustained by the strong 26% increase in assets sourced through regular savings plans (RSPs). As of June 2008, RSPs accounted for more than one-fifth of KoreaÆs mutual fund assets. This is in stark contrast to the 7% contribution RSPs made just two-and-a-half years ago, and the growth in the number of RSP accounts and assets shows no sign of slowing down. The strong flows coming in from RSPs show a way forward for all mutual fund markets in Asia. Not only are such programmes demonstrating their ability to cushion the blow of volatile markets (especially given the speculative asset classes so favoured by Korean investors), but they have also helped their proponents gain market share. Local banks, despite failing to compete with the foreign banks in terms of advisory services and wealth management products, have enjoyed a steady stream of assets via their focus on opening RSP accounts for their mass retail customers.

The very strong but largely speculative flows into ChinaÆs mutual funds in 2007 have come to a very abrupt end, and the market has entered a period of net outflows. This, combined with market depreciation, saw total assets under management decline by a hefty 34.5% in just six months to reach Rmb2.18 trillion ($318 billion) as of June 2008. Faced with these falls, the Chinese retail product engine also appears to have lost steam, with far fewer fund launches in 2008. On the other hand, the institutional segment is looking more positive. Fund managers can finally engage in discretionary fund management business, while Chinese institutions are awarding more third-party mandates. However, Cerulli does not think that, in the short term, institutional revenues will be able to cushion much of the fall in ChinaÆs retail business. There is nowhere to run to in China, and managers just have to resign themselves to slowly picking up the pieces. Over the next few years, Cerulli expects to see gradual deregulation, leading to more low-risk products, better advisory services, more distribution channels, and a greater focus on investor education. On the other hand, the fate of fund companies will still lie very much in the hands of the regulators. Long-term planning is therefore a luxury and, in most cases, managers must simply respond to rule changes as they arise.

The Indian mutual fund industry experienced unprecedented expansion in the 2005-2007 period, with year-on-year growth of 32%, 62%, and 68%, respectively, and a high of Rs 5.8 trillion ($135 billion) reached in May 2007. In 2008, however, this growth ground to a halt with the first six months of the year seeing a fall in mutual fund assets of about 5%. Nevertheless, given that stock market indices over the same period were down by more than 35%, the picture is not as alarming as earlier feared. Compared to China, which has seen assets shrink by more than 30%, the Indian market can be said to be showing considerable resilience. Managers are still hopeful that asset growth will resume fairly rapidly, even without a large rebound in the market, on the back of higher penetration and better distribution infrastructure.