Distributors criticise Asian managers for communication failure

In contrast to US and European peers, Asian distributors select funds on the basis of past performance and manager reputation more than informed judgment about future performance, Greenwich Associates finds.

In part, this emphasis derives from the fact that demand among Asian retail investors is driven by recent performance and fund-family brand strength, the research firm notes.

But distributors in this latest Greenwich study – the results of which are due to be disseminated today – also criticise investment managers in Asia for their failure to communicate investment processes clearly enough.

The research house argues that managers can have a major impact on fund sales by equipping advisers with better product knowledge rather than focusing on expensive advertising campaigns, conferences and websites.

Accordingly it urges Asian distributors to demand that asset managers do a better job of explaining their processes and providing more timely communications.

In its study, Greenwich interviewed 124 gatekeepers and 39 sales/advisory professionals at intermediary distribution platforms across Asia (ex-Japan and mainland China).

What was striking was that in Asia past performance and reputation was ranked so highly, far outweighing expected future performance.

It stands in contrast to Europe, for example, where predictable performance in different market conditions and expected outperformance over three to five years score highest in the equivalent Greenwich study.

“Many fund selectors across Asia simply do not have a strong understanding or opinion about the ability of individual managers to deliver outperformance, so they rely on more accessible measures of performance and reputation,” says Singapore-based Greenwich consultant Abhi Shroff.

Greenwich says it expects Asian distributors gradually to adopt a similar methodology to that used by fund selectors in North America and Europe, analysing investment capabilities from an organisational and process perspective to assess a firm’s ability to deliver future performance.

“But the message we are getting from distributors is that asset managers are not doing an adequate job explaining the underpinnings of their investment processes in a way that would give fund selectors such insight,” stresses Shroff.

On average Asian distributors include 124 fund products on their platforms. Yet retail banks, private banks and securities houses say that 80% of platform sales originate with fewer than 20 individual funds.

In terms of what determines sales success, distributors cite past performance as the primary driver. But the next two factors identified as most important concern service and communications, including responsiveness from managers related to changes in market conditions.

“Managers can have a significant impact on fund sales by getting the basics right in terms of equipping advisers with a comprehensive knowledge of the product and by providing them with regular and timely materials that help inform advisers’ thinking about how to position the fund amid changing market conditions,” says Greenwich consultant Markus Ohlig.

The research house acknowledges that shortcomings in this area can partly be attributed to logistical challenges, with much analysis of Asian funds carried out by US and European firms not written in local Asian languages – with translation leading to delays in communication.

“Rather than having to wait two to three days for a detailed and well-presented summation, managers’ investment or research teams should look to provide informal emails with analysis and commentary on a real-time basis,” says Shroff.

A total of 19 foreign asset management firms in the study reported having fewer than five staff on the ground in most Asian countries, with Taiwan (average 13) and India (25) the notable exceptions.

The 124 intermediary distributors in the study distribute about $500 billion in investment assets – or about 70% of the $700 billion that Greenwich estimates for the overall intermediary market in Asia (ex-China and Japan).

Taiwan makes up the biggest market ($164 billion), with Hong Kong ($61 billion) and Singapore ($36 billion) trailing – although substantial private banking assets are accounted for by Ucits funds, where distributors may not keep separate records for Asia-sourced funds.

At $234 billion, retail banks account for almost half the distributed asset pool covered in the study, followed by asset managers at $108 billion.

In terms of fixed income products, Asian fund distributors rank money-market and balanced funds as among their most popular.

Looking ahead to 2012, 37% of distributors expect to see a big pick-up in retail demand for global bonds and emerging market bonds.

On the equity side, distributors rank domestic stocks as far and away the top-selling products on their platforms. Among these, Chinese equities as well as Asia ex-Japan and emerging market equities are most commonly cited as among the top-five sellers.

For the year ahead, 38% of distributors expect retail demand to increase for emerging market equities, 36% for Asia ex-Japan equities and one-third for Chinese equities. The greatest decline is expected among European equities.