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Cost control not the only solution; product range must be beefed up to tap into opportunities in Asia
June 2019, Singapore—Fee pressures are intensifying in the mutual fund industry in Asian markets amid volatile market conditions, forcing managers and fund distributors to review their strategies to obtain steady revenues, according to Cerulli Associates’ newly released report, Asian Distribution Dynamics 2019: Opportunities Amid Volatility.
Market volatility impacted asset growth in 2018 for the six markets covered in this report. In fact, 2018 had one of the slowest asset growth rates since 2013. Prevailing market uncertainties are likely to add to the woes of managers in the region. Developments such as the launch of low-cost products, including exchange-traded funds (ETFs),
and fee competition in this segment, as well as the entry of more robo-advisors into the market, all point to downward trends in fees over the long term. Cerulli’s research insights and survey findings clearly show such pressures building up in key fund categories.
Fee-related regulations are developing in Asia’s mutual fund markets in the form of enhanced disclosures or new fee models, aimed at driving down the cost of mutual fund investments for end-investors. Last year, Taiwan and India saw major fee-related initiatives in the form of new models of charging commissions. Taiwanese distributors are trying to gain as many retrocession fees as possible from managers, before the new assets under management (AUM)-based fee model officially kicks in next year. Hong Kong and Singapore distributors are also demanding greater shares of retrocession fees. In India, distributors–especially independent financial advisors–are irked by the abolition of upfront commissions and lowering of total expense ratios (TERs).
“In the years to come, as information becomes more available and investing avenues become more accessible, investors will increasingly question costs incurred on investments and returns. Optimizing cost efficiencies in some functional areas is one obvious answer for managers to combat fee pressures. Apart from that, managers will likely need to come out with low-cost products or develop their capabilities in higher fee-earning alternatives,” said Leena Dagade, an associate director at Cerulli.
Banks in Hong Kong and Singapore are going to increasingly focus on improving the advisory and discretionary portfolio management (DPM) business for steady inflows to reduce their reliance on transaction-driven income. However, no immediate change is seen in the commission-based fee models across the region, according to Cerulli’s survey of managers.
Despite fee pressures, Asia continues to offer fertile ground for managers to expand, due to its low fund penetration rates compared to those of developed markets. Asia’s regulatory regimes are helping propel the growth of their fund management markets, a trend that will only gain strength in the coming years.
“Regulations will continue to evolve, in various areas such as investor protection, cultivating local markets, embracing newer modes of distribution, and raising retirement awareness. Cerulli believes that these measures will bode well for the fortunes of Asia’s mutual fund industry over the long term, despite market fluctuations. Hence, the region should feature highly on global managers’ radar,” said Radiance Ang Huey Li, an associate analyst at Cerulli.
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