The future's passive for Asia distributors

Asian distributors will increasingly have two mutual fund lists with passive funds as their core portfolio building blocks, a research house has predicted.

This trend is set to be driven by the anticipated ban on retrocession or trail fees in Asia, as well as investors’ unwillingness to pay high fees for mediocre returns.

Shu Mei Chua, associate director at Cerulli Associates, said distributors in Asia typically have a single fund list comprising the majority of active funds as these generate more revenues than passive funds. But a small number of distributors, such as 8 Securities, have come into the market providing low-cost passive funds as their core portfolios.

Regulators in Hong Kong and Singapore have started calling for more transparency around sales and commissions, as exemplified in the new rules around Ilas, said Chua.

Though regulators have yet to discuss rules around fund sales commissions, Chua said the consensus in the industry is that regulations from the UK’s Retail Distribution Review (RDR) or Europe's Markets in Financial Instruments Directive (MiFID) will trickle down to Asia.

"These regulations, which give greater clarity on products, services, and fees, will revive the age-old debate of active versus passive investing as investors gain a clear understanding of what they are paying for," she said.

"The divergence between alpha and passive investments will lead to increasing demand for low-cost, passive investments, and distributors will respond with two fund lists - an evergreen, passive product shelf, and a satellite list of actively managed funds."

Cerulli made this forecast in its latest Asian Fund Selector 2015 report, which covered fund selection dynamics in the mutual fund markets of mainland China, Taiwan, Hong Kong, Korea and Singapore. It interviewed 28 fund selectors ranging from big banks to IFAs.

On fund selection criteria, Cerulli’s findings showed that fund performance has gone from the top priority in 2014 to third in importance this year, coming after investment process and experience/turnover of the investment team.

Global and regional banks again emerged as the most stringent fund selectors, giving greater emphasis on all fund selection criteria with the exception of fund performance and fund fees.

“Fund selectors at global/regional banks seemed to have an inkling that the various matrices and scorecards they use serve as guidelines rather than hard-and-fast rules. In particular, the quantitative aspect of fund selection, based on historical data, is retrospective in nature,” she said.

“At most distributors, it is the softer elements of qualitative assessments that look into the future by determining if the portfolio manager is capable of delivering fund outperformance going forward.”

On the question of what fund selectors value in marketing and servicing support from fund managers, Cerulli highlighted the fact that there is a disconnect between fund selectors and fund managers. The former valued three items the most: fast turnaround of requests, timely and relevant materials for public dissemination, and timely reporting for internal monitoring. Contrast this with what fund managers think fund selectors want: more training for sales staff, greater marketing and sponsorship support and face-to-face meetings with marketing/sales staff.

Chua said the complaints from fund selectors about timely delivery of information and materials from fund managers are not new, but the message hasn’t gone through to the fund managers. This was because asset managers perceived that fund selectors were seeking greater servicing support in terms of sales training and marketing sponsorship, but they were missing out on the fundamental requirement to help fund selectors perform their daily task of fund monitoring.