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Emerging long-term trends key to unlocking Asia Wealth, says Cerulli

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The Asia-Pacific region is dealing with intensified regulations, pressured revenues, narrowing distribution, reluctant inflows, and other challenges. Cerulli contends, however, that opportunity presents itself in long-term trends such as changes in regulation that will actually expand investment opportunities and demographic and market developments that will facilitate sales of products that do not currently have a strong presence among Asian investors.

Asian investors will likely soon have an expanded repertoire of asset classes and fund structures because regulators recognise investors’ need to diversify their risk and hedge exposures. This is already happening in Thailand, as its provident funds will now be able to invest up to 15% of net asset value in commodity funds, infrastructure vehicles, and other “alternative” products.

In the longer term, China is likely to tread a similar path, despite the fact that the China Securities Regulatory Commission has so far refused to let mutual funds expand their product range beyond long-only equities and bonds, most of which are Chinese. This domestic-centric nature has long-term implications for investors (Chinese stock markets are inherently volatile and the accounting practices of some Chinese companies’ are dubious). Cerulli thinks that eventually, Chinese regulators will conclude that it is in investors’ best interest for the mutual fund industry to have more room to manoeuvre. In fact, Chinese regulators recently gave permission for seven exchange-traded funds (ETFs) to use margin trading and short-selling.

“If that initial run goes satisfactorily, more ETFs will be allowed to do so, and this may eventually pave the way for long-short funds, such as UCITS,” says Shiv Taneja, Director at Cerulli Associates.

Another opportunity exists in the fact that throughout Asia, people are living longer. Combine that with the new norm of financial market volatility, unpredictable inflationary patterns, and in increase in the sheer number of financial products. “These developments point to opportunities for fund managers to offer their skills to specialised market segments with specific needs,” says Taneja.

Inflation-protected funds are one example of this concept. These funds are currently a less popular proposition outside Australia, where assets under management (AUM) in was USD1.2 billion in 2010. However, Korea-domiciled inflation protected funds’ AUM expanded to USD23.8 million in November 2011, from USD5.1 million in 2010 and USD2.3 million in 2009. China’s inflation-protected funds have also followed an upward trajectory.

 

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