Asia Pacific's family offices are a nimble bunch and never more so than when it comes to ESG where they're already proving to be ahead of the regulators.
ThailandÆs mutual fund assets totalled $46.5 billion in 2007, making it the regionÆs largest market, while Vietnam remains the smallest with only $300 million in assets. The data comes from Cerulli AssociatesÆ second comprehensive report on the Southeast Asian asset management industry, which also includes Malaysia, Indonesia and the Philippines. Singapore and its mutual fund assets of $26.8 billion have been excluded from the report.
Gina Heng, a Singapore-based analyst at Cerulli Associates, says the strong performance of Southeast Asian stock markets last year encouraged substantial net flows into mutual funds and other wealth management products. Regulatory reforms and other developments also played an important part in helping increase mutual fund penetration. The relaxation of overseas investment quotas in Malaysia and Thailand, for instance, generated strong interest from investors looking to allocate more money overseas.
In March 2007, the limit on overseas investments of Malaysian investors was increased to 50% from 30% of the total assets held by individual fund houses by Bank Negara. ôThis liberalisation resulted in innovative development and marketing approaches to both foreign-invested and domestically invested funds,ö Heng says. ôThis easing has also created more opportunities for local and foreign fund managers to raise assets from the Malaysian market, including those without an onshore or even regional presence.ö
Two years ago, Bank of Thailand put in place a mutual fund industry quota of $10 billion for overseas investments, which has been used up. The Securities and Exchange Commission has been allocating this quota to each individual fund house that applies for a share. Just last month, the Bank of Thailand approved an additional $12 billion quota for overseas investments, but thatÆs for the country as a whole and includes the share of fund houses, insurance companies, and securities firms. The actual amount allocated for fund houses under the new quota has not been disclosed.
Regulatory reforms are expected to continue to help strengthen the mutual fund industry in most Southeast Asian markets. Malaysian regulators in particular have put mutual funds, including sharia-compliant products, high on their agenda. Specific to MalaysiaÆs bid to become an international Islamic financial centre, the government is allowing Islamic fund management companies to be 100%-owned by foreigners. Islamic fund management companies will be allowed to invest all their assets overseas and will be given income tax exemption on fees received until 2016. They will also be able to tap into RM7 billion ($2.2 billion) in seed money from the Employees Provident Fund, the national pension fund for the private sector in Malaysia.
There are exceptions, however, such as the Philippines where regulatory reforms related to the mutual fund industry lag the rest of the region but is nevertheless improving. The Philippines is the only market where mutual fund assets shrank last year.
Heng notes that Southeast Asian markets as a whole are providing attractive opportunities for asset management companies to explore, not just as an add-on to North Asian business where most of the international managers tend to focus because of the significantly larger share of the market.
While Southeast Asian markets are still considerably smaller than their North Asian neighbours, Cerulli Associates believes that growth in the former will exceed that of the latter, driven by regulatory reform, pent-up investor demand, increased wealth, and a burgeoning middle-class.
ôThe retail and institutional markets here offer foreign players the chance to enter at an opportune time ahead of the product saturation seen in many North Asian markets, but with the worst of regulatory controls and confusion behind them,ö Cerulli Associates says.
Cerulli Associates expects mutual fund assets in Southeast Asia to grow around 17% annually over the next five years, a brisk pace compared to the more developed mutual fund markets. The five-year growth projection is slower than the 31.4% growth in Southeast Asian mutual fund assets over the five-year period from 2002 to 2007, however.
Heng says Cerulli AssociatesÆ growth estimates are conservative and takes into account that stock market performance in the region tends to be volatile.
With a record number of mutual funds launched in 2007, mutual fund assets in Malaysia reached RM71.8 billion ($21.7 billion) in end-December, up 40% from 2006 on the back of an increase in retail demand for overseas-focused funds and the further liberalisation of the overseas investment limit. Despite Islamic funds accounting for only a small percentage of the mutual fund market share at the moment, the Malaysia International Islamic Finance Centre (MIFC) is stepping up efforts to make Malaysia a centre for Islamic fund management.
In Indonesia, mutual fund assets grew 79.3% to $9.7 billion in 2007 on the back of strong domestic stock market performance. Demand for equity funds increased, while capital-protected funds û introduced in Indonesia largely as a way to absorb bond fund outflows û saw their market share rise to almost a quarter of the market in 2006 before losing ground to equity funds one year later. The banking channel continues to dominate fund distribution in Indonesia, accounting for 77.5% of the market.
In Thailand, mutual fund assets grew 35.3% to $46.5 billion in 2007. Total assets under management rose 25.4% to Bt2.2 trillion ($73.5 billion) in 2007. Mutual funds make up only one aspect of ThailandÆs asset management industry, which also consists of private and provident funds. The bulk of the growth in mutual fund assets can be attributed to the popularity of foreign-invested funds (FIFs).
In the Philippines, asset management is a small but highly fragmented industry, with two types of funds in the marketplace, the unit investment trust funds (UITFs) offered mainly by banks as well as mutual funds offered mainly by fund management companies. UITFs have been better received by investors due to their various operating advantages, as well as their extensive distribution networks, but mutual funds are catching up, Cerulli Associates says. Plain vanilla funds dominate the marketplace, although proposals to introduce Reits and exchange-traded funds (ETFs) in 2008 should help give fresh impetus to the industry, it adds.
Total investment assets under management in the Philippines rose 58.6% to a new high of Ps659 billion ($16 billion) in 2007, but thatÆs mostly due to the doubling of assets in discretionary portfolios, also known as investment managed accounts (IMA). Mutual fund assets totalled $5.9 billion last year. IMAs, which are managed by trust departments of banks or financial institutions, are used largely by high-net-worth and institutional investors in the Philippines who are able to benefit from the greater flexibility and fewer investment restrictions that such instruments offer. The recent uptrend of IMA assets suggests that high-net-worth and institutional investors are beginning to appreciate the value of professional management and risk-bearing investments, despite the availability of special risk-free deposit returns, Cerulli Associates says.
VietnamÆs mutual fund industry, meanwhile, is still in its infancy and retail opportunities are limited, according to Cerulli Associates. Given the lack of capital market opportunities, clear regulatory guidelines, and distribution networks, it will take some time before retail interest takes hold in Vietnam. The total AUM of the three previously launched public funds amounted to a mere Vnd4.7 trillion ($300 million).
Cerulli Associates notes, however, that not all public fund assets are sourced from retail investors. A significant portion is sold to institutional and foreign investors, while the majority of retail investors still prefer to trade in securities and are unfamiliar with the concept of mutual fund investing. An anomaly worth highlighting is the charging of performance fees for public funds. Fund managers in Vietnam have justified these fees in recent times by pointing to the fundsÆ strong returns amid vibrant market conditions. However, VietnamÆs regulators appear to be keeping an eye on the situation and it may not be long before regulators step in to impose limits on fee charges.
Based in Boston, Cerulli Associates provides financial institutions with guidance in strategic position and new business development. In Asia and the Middle East, Cerulli Associates focuses on over 20 primary and secondary asset management markets, providing strategic knowledge and research in product development and distribution.
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