Fund sales in Asia suffer amid uncertainty, trade frictions

Investor uncertainty about the short-term direction of markets is causing a high degree of turnover but is also sapping enthusiasm for active investing, new research by Broadridge shows.

There is "less exuberance" for active investing, the fintech solutions provider said after its analysis showed sales of onshore funds in Asia slowing to $8.5 billion in the April-June quarter from $45.6 billion in the first three months of the year. 

Although the first-quarter numbers were much stronger than the second quarter's, the trend for fund flows to decline is set to continue for the foreseeable future, Ng Yoon, director of APAC Insights at Broadridge in Singapore, told AsianInvestor.

“This has been quite a tricky first half,” she said. “There has been a complete reversal of the positive flow trends seen in recent years.”

Ng added that the change in sentiment was due to investor concerns about increased volatility in global markets, the escalating trade wars and the knock-on effects of the Turkish lira currency crisis on sentiment towards emerging markets generally.

As the chart below shows, 2015 and 2016 were good years for fund flows, with all fund sectors benefitting, according to Ng. The other key trend highlighted here is the continued ascendancy of exchange traded fund (ETF) sales.

Chart 1. Asia fund sale trends by quarter 2015-2018

Source: Broadridge

Five of the six top-selling funds in Asia during the second quarter were ETFs. AsianInvestor has previously reported on the massive boost given to the ETF market in Japan by the Bank of Japan’s aggressive buying as part of its quantitative easing programme. This trend has continued to drive the market and, according to Broadridge, the most popular fund in Asia remains the Nomura Topix Linked Listed Investment ETF.

Institutional support for ETFs is not mirrored elsewhere in Asia. The other big growth market for ETFs is Australia, Ng said, but this is driven by retail buying via platforms, robo advisers and passive superannuation fund options (see chart below).

Asset classes that are gaining support include mixed-asset funds and dynamic asset allocation funds, she said, reflecting a move away from high-yield and credit strategies, particularly among institutions.

That highlights how investors are tending more towards longer-term strategies due to the growing short-term uncertainty.

The fact managers who dominated in the high-yield space are no longer in the top-10 of fund sales shows how the balance of power has shifted, Stewart Aldcroft, managing director of Citi Trust Services in Hong Kong, said. 

“Where one firm might be strong in a particular asset class, for example high yield, they are unable to replicate that success in other products,” he told AsianInvestor.

The Broadridge report shows Japanese groups took up the top-three places for onshore fund sales in Asia in the 12 months to June-end.

Nomura garnered the best net sales at $24.9 billion, ahead of Sumitomo/Nikko, which posted net sales of $19.6 billion, and MUFG. But excluding ETF sales, Nomura drops out of the top-5 while Sumitomo/Nikko hit the top with $9.3 billion in net sales. 

The biggest trend in institutional fund flows, according to the report, is the reversal in flows into US credit strategies, which had been the top-selling fund sector in the five quarters to March-end this year. In the second quarter the sector began to see its first net outflows, with investors concerned abut the strong US dollar and increasingly worried about credit quality.

PASSIVE AGGRESSIVE

Instead, institutional funds are now flowing into passive fixed-income funds and multi-sector mutual funds, Ng said.

Mixed assets dynamic and mixed assets income funds drew interest across Asia. The first saw net inflows of $4.3 billion in China and $1.3 biliion in India in the second quarter, but did not do as well in Australia, where there were net outflows of about $1.2 billion in the same period.

Over the same three months, the top-selling master group was Sumitomo/Nikko, followed by MUFG, BMO/Haitong, M&G/Eastspring and China AM. Sumitomo/Nikko sold a fair mix of active, ETF and index funds, according to Ng. Active funds provided the main traction for the BMO/Haitong joint venture, whilst for the remaining groups in the top-five sales success came primarily from ETFs.

In Asia, Aldcroft said the fund flow numbers in Hong Kong for the first five months of this year are very good, but only if you look at gross fund flows. Looked at on a net basis, after redemptions, the numbers are less impressive.

Gross fund flows to the end of May were $48 billion, according to Hong Kong Investment Funds Association data, while redemptions were just over $45 billion − a net gain of barely $3 billion.

The high turnover of funds is directly related to the growing uncertainty among investors, Aldcroft said.

“There is very little clarity about the direction of markets. Rising interest rates are not good for bond funds. The strength of the US dollar is making emerging currencies look weak, so if you are making gains on [emerging market] bond funds, they are wiped out by the currency,” he told AsianInvestor.

That creates challenges for asset allocators and distributors. “They are going to have to encourage a much longer term approach, through balanced and multi-asset products,” Aldcroft said.

Furthermore, he said investors who haven’t got into markets like the US at lower levels are unlikely to be enticed in now.

Nonetheless, the latest global investor survey by Bank of America Merrill Lynch (BAML) shows that allocations to US equities rose to their biggest overweight (19%) since January 2015, making it the top equity region for the first time in five years.

The BAML survey was conducted from August 3-9 and covered 185 participants with $534 billion in assets under management.

The main conclusions from the survey are that “Long FAANG+BAT” (54%) -- basically, the biggest listed names in US and Chinese technology -- remains the most crowded trade, identified by investors for the seventh straight month and the most crowded outright since the long US dollar trade in December 2015. The top-three crowded trades in August are rounded out by “Short EM equity” (15%) and “Short Treasuries” (11%)

Source: Broadridge