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Global funds industry shifting to Asia

More than ever, fund management companies of all stripes need to build distribution into Asia and the Middle East, says Strategic Insight.

New York-based consultancy Strategic Insight says in a new report that the credit crunch has revealed the essential need for fund management companies to have a distribution into Asia – and predicts many more will build it.

Source: AsianInvestors, 27.10.2008 by Jaime DiBiaso

Funds under management in Asia as well as the Middle East and Latin America will grow much more quickly than those in the United States and Europe over the next five years, says Daniel Enskat, managing director and head of global consulting.

Fund companies that lack an Asian reach have suffered the most in the credit crunch, he suggests – not only because they missed out on last year’s asset-gathering bonanza, but because redemptions in Western countries, particularly Europe, have been most severe.

Such companies with only European clients, even if they have great performance, are nonetheless suffering acute redemption pressure, because investors are panicking and dumping anything to move to cash.

Strategic Insight says mutual funds in Asia have enjoyed net inflows of $60 billion from January to August, versus a net outflow of $360 billion in Europe.

Finally, for fund companies around the world, Asia is the most likely source of business to pull them out of the slump, due to its demographics, its economic growth prospects, the low penetration of investment products and the youth of the domestic fund industries.

Enskat cites China as an example. He compares China’s investors today to European ones in the run-up to the 2000 tech bubble collapse. In both cases, many first-time investors got burned. In Europe, investors generally switched to low-risk savings products and capital guarantees. So far, however, Chinese investors don’t seem to be in full retreat.

“Distributors don’t want to make the same mistake in China,” Enskat says. “They want to educate investors about having a longer-term framework.” He notes that regulators have taken a proactive stance against mis-selling and improving products, which is why the industry hasn’t suffered the kind of mass redemptions that have taken place this year in markets such as Germany and Italy.

Enskat reckons there is also a cultural factor. He says Asian societies, lacking a welfare state, have instilled a sense of self-reliance. First-generation entrepreneurs are relatively young and willing to take risks with their money, while Westerners, already wealthy, are more interested in capital preservation. “Asian investors are proactive, not defensive,” Enskat concludes.

He says the credit crunch, and blow-ups such as the Lehman Minibond fiasco in Hong Kong and Singapore, is an opportunity for the mutual-funds industry to argue its case: that funds are the most transparent, liquid and straightforward investment products that investors will find.

“Distributors want a simple story told with conviction for a transparent product,” he says.

The challenges are how to convey this message to investors (and to distributors’ sales teams). High management fees and front-end loads can be a problem during bear markets, although Enskat believes investors are willing to overlook these when times improve; eventually Asia will need to shift to an American model in which asset managers force their brokers to sell on the basis of advice, rather than commission for pushing products.

Today it seems nearly all the big global names in asset management are already on the ground in Asia. But Enskat observes that there are many small- and mid-sized fund managers in Europe and Asia that have yet to set up a presence in the region. Should this matter?

Consider, Enskat suggests, that two-thirds of today’s top 50 global houses would not have been ranked 10 years ago. Names like AllianceBernstein, BGI, Janus, Pimco, SSgA and T. Rowe Price would not have figured.

Now consider the coming regulation of the hedge fund industry. The biggest hedge funds will find themselves going public and competing for assets from sovereign wealth funds and other institutional investors, rather than rely on family offices and endowments. How many of these will be in the top 50 in another decade’s time? And how many of them have distribution networks in Asia now?

And the traditional funds world will also throw up new winners that are relatively unknown today, Enskat argues. He notes that fund companies can become major players on the back of a single product, citing Kokusai’s income bond fund (sub-advised now by Western Asset), Pimco’s total return bond fund, Pictet’s utilities fund, BlackRock’s global allocation fund and some of Schroders’ global balanced funds for UK pension clients.

There are plenty of mid-sized players in America and Europe with similar products, some of which will become the blockbusters of the future – but these companies have no exposure to the world’s new growth markets. Which means they will be looking to set up distribution arrangements. The pain of the credit crisis is going to accelerate this process.

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