Malaysia and Thailand stand out as the two Southeast Asian markets where foreign-invested funds are on the rise, based on a variety of structures including master-feeder and sub-advisory arrangements that give access to overseas fund managers, according to financial services consulting firm Cerulli Associates.

In Thailand, Cerulli notes that sub-advised funds are far less common than feeder funds. Of the 282 fully foreign investment funds or so-called FIFs (those funds with at least 80% of assets invested overseas), 63, or about one-fifth, adopt a feeder-fund structure, according to the Securities and Exchange Commission (SEC). These are primarily equity funds, and as a result, account for only 5% or Bt15.4 billion ($428 million) of total FIF assets. Almost all the rest are direct investments by local managers into offshore bond issues.

The picture in Malaysia is similar, although less stark. Cerulli's research into 150 foreign-invested funds suggests that directly invested funds, primarily offered by market leader, Public Mutual, account for close to half of all FIFs. The remaining half is equally divided between feeder and sub-advised funds, while less than 5% are funds of funds.

A number of factors come into play for local managers weighing the advantages of one structure over another, says Cerulli, and these point to the status quo in the short-term, but a possible expansion of sub-advisory arrangements in the medium-term. Keeping up with demand at a broad industry level, both Thai and Malaysian fund managers have had to contend with one major issue over the past few years -- how to make the most of deregulation and expanding interest in overseas markets, the firm says.

Cerulli cites some of the deregulation that has taken place. In Malaysia, the overseas investment limit for domestic fund managers was raised from 30% to 50% in 2007, as the pent-up demand from years of currency controls began to unfold, causing assets to flow into European, and subsequently Asian, equities. In Thailand, retail investors sought short-term exposure to rapidly rising offshore equity markets, and then offshore bond markets, while the overseas investment quota for institutional investors was raised to Bt9.8 billion ($272 million).

The lack of in-house expertise in foreign markets and the small asset base initially prompted distributors and local managers to take advantage of the readily available offshore-registered master funds, including their existing track record, branding, and marketing materials, Cerulli says.

However, Cerulli notes the pendulum has since swung away from master-feeders. A number of prominent, local managers -- keen to maintain their strong brand presence -- are now investing directly in overseas markets, primarily via passive portfolios of listed securities or exchange-traded funds (ETFs).

Cerulli believes that, in the short-term, master-feeder structures will continue to appeal to local managers in Thailand and Malaysia, while a handful remain committed to enhancing their in-house capabilities. However, as the post-crisis Southeast Asian market shifts from traditional to specialist asset classes and alternative investment techniques, local managers may consider engaging sub-advisors as a way to stand out from the crowd, while foreign managers may wish to increase their resource efficiency via an expansion of their sub-advisory business, the firm adds.