Asia ex-Japan’s mutual funds industry is forecast to see steady AUM growth to break through the $1.5 trillion barrier by 2016, at a compound annual growth rate of 11%.
That stands in contrast to the -5.6% CAGR it registered from 2007 to 2011, stemming from dismal fund flows and underperforming equity markets, reports research firm Cerulli Associates in its latest report, Asian Distribution Dynamics 2012.
By end-June this year industry AUM had increased 8.4% from the end of last year to $987.6 billion. Cerulli forecasts it will break through the $1 trillion barrier by the year’s end, meaning it would catch up with 2009 and 2010 (but perhaps not the $1.15 trillion high at the end of 2007).
However, while it expects assets to rise over the next few years, it has revised its projections downwards. “Growth, if any at all, will likely be gradual,” it says in its report.
It adds that AUM expansion will likely to driven by products offering income and yield “for as long as interest rates remain low and global macroeconomic conditions uncertain”.
It points out that the retail bank channel – which accounts for more than 50% of AUM in most Asia ex-Japan markets – continues to narrow four years after the global financial crisis drove retail banks to trim their product suites and list of fund management partners.
Cerulli says it knows of one global bank that has terminated relationships with 90% of its fund partners in the past two years.
“During this time of intense regulatory scrutiny and rough markets, the banks want fewer but stronger relationships with key partners that have demonstrated solid fund performance and impeccable client service,” says Ken Yap, Cerulli’s head of Asia-Pacific research.
As retail banks’ shelf space constricts and competition intensifies, some fund houses are focusing on alternative channels such as private banks, insurers and, to a lesser extent, direct sales, Cerulli notes.
According to its survey of fund managers, aside from local banks, asset houses are keenest to explore distribution through private banks over the next three years; insurers rank close behind.
But to get into private banks’ top 10 fund lists, managers often have to pay higher trail fees of 50% or more and be willing to pick up the tab for marketing expenses, event sponsorships and advertising.
“Hiring people to specifically serve private banks may be another way for managers to demonstrate commitment to the distributor, given that private banks can, in some ways, be more demanding than retail banks when it comes to client service,” finds Cerulli.
It says the insurance channel offers a key advantage in that investment-linked products generally provide stickier flows than funds sold through retail banks, where churn can be high.
However, it cautions that insurers can be a costly channel; in addition to trailer fees of 50% to 80%, some want their fund partners to pay for expenses ranging from agents’ incentive trips to seminar refreshments.
As for direct distribution, the benefits of retaining more management fees and reducing reliance on third-party providers are counterbalanced by having to hire an army of salespeople for an uncertain AUM stream.
“More importantly, fund houses’ attempts to build a direct sales force are sometimes frowned upon by distributors, who see it as competition for clients,” Cerulli notes.
The data provider also researched views on whether ETFs can overtake mutual funds, given that the segment has recorded CAGR of 23.9% from 2007 to end-June this year.
It notes, too, that the number of ETFs under its coverage (China, Hong Kong, Singapore, Taiwan, South Korea and India) has increased five-fold from 51 in 2007 to 268 by June 2012, while the number of mutual funds increased 17.5% to 13,487 over the same period.
But Cerulli points out that ETFs are relatively new in the region and their AUM accounts for just 5.3% of the combined assets for mutual funds and ETFs as at June this year (a rise from 1.8% in 2007). So it believes ETF growth can largely be attributed to lower base effects.
In a separate report, entitled Institutional Asset Management in Asia 2012, Cerulli picks up on the disintermediation trend, noting that institutional investors across Asia ex-Japan have become more cost-sensitive.
It suggests many are thinking of managing more assets in-house, although the most established institutions are generally willing to pay fair rates for best investment management and servicing.
What is increasingly clear is they want alignment of interests with partners, and deal-making is becoming more prevalent among large institutions including GIC, Temasek and, to a lesser extent, CIC.
“Managers hoping to work with some of Asia’s largest institutions will increasingly have to think more like a deal-maker than a traditional asset manager,” notes Cerulli. “It requires a different business model, corporate culture and ilk of salespeople and investment managers.”
A Cerulli survey of fund houses shows managing assets from central banks, quasi-government organisations and pension funds yields top profits, while family offices are the least profitable.
But given that these mostly have conservative allocations, it would appear this is a volume story. In fact, when asked their views on projected asset contribution in three years’ time, central banks/quasi-government organisations, along with SWFs, came out on top.
Central banks/quasi-government organisations, SWFs and pension funds made up 83.7% of institutional AUM as at June this year, an 82% increase from the end of 2011. Meanwhile, corporate and commercial banks’ share of AUM has consistently declined since 2010 to 10%.
Family offices contribute only a tiny proportion to managers’ institutional AUM, although they could rise in importance in future years, especially in Singapore and Hong Kong, says Cerulli.