Asset managers should not focus on fund performance as the only parameter to feature into a fund selectors buy list as investment philosophy and investment process are also ranked high by gatekeepers in Asia, revealed a Cerulli report.
A key finding of Cerulli Associates' inaugural Asian Fund Selector 2014 is that, apart from a common preference for strong fund performance, as well as branding and marketing support from asset managers, there was a “surprising” divergence in many other fund selection criteria between fund selectors and asset managers.
And, asset managers ‘largely’ do not appear to have caught up with this new dynamic in fund selection, highlighted the report that researched Asia ex-Japan's largest mutual fund markets–China, Taiwan, Hong Kong, Korea, and Singapore.
The report also found getting mutual funds on distributors' shelves has become more challenging for asset managers since the global financial crisis, as funds are being replaced by more calibrated approaches to fund selection by gatekeepers.
In contrast to asset managers’ thinking process, the research revealed poor fund performance does not equate to “immediate” removal from a distributor's buy list, as fund selectors rank underperformance as the third most important criterion for a fund's removal, and give higher weight to inadequate risk control and lack of transparency.
"Asset managers have to move away from the 'one-size-fits-all' distribution approach to provide a tailored, focused strategy for each type of distributor to get on fund selectors' buy lists," says Shu Mei Chua, a senior analyst with Cerulli, who led the report.
All distributors, ranging from global banks to the smaller independent financial advisor firms, have different client needs, which means varying appetites for product strategies and different drivers of servicing support, Chua added.
When asked to rate their top criteria for fund selection on a scale of 1 to 5, 1 being not important and 5 most important, respondents rated fund performance as 4.7, followed by investment philosophy and investment performance at 4.4 and 4.3, respectively.
Experience or turnover of the investment team received 4.3 rating while timely, accurate, deep fund data scored 4.1.
Parallel trend to Europe
The research also found fund selection process in Asia is in “parallel trend” to Europe as investment philosophy and investment processes are ranked high in the thoughts of fund selectors in Asia also.
In the relatively “more sophisticated and mature mutual fund markets” of Singapore and Hong Kong, investment process and philosophy tend to be the most important drivers, Cerulli said.
“This mirrors what we found in the European Fund Selector 2013 report, and affirms the current status of Hong Kong and Singapore as global financial centers, as they tend to mimic best practices in the West.”
Cerulli termed this is a positive trend as it suggests fund selectors put a premium on transparency and are serious about due diligence.
Selecting and deselecting funds
In terms of selection process, the report highlighted why fund selectors add funds to their product suites and how often they are likely to do it.
The survey found the most common reason for adding a fund to a buy list was to widen product offerings, as fund selectors seek to plug gaps in their product suite.
“So, it may be useful for asset managers to focus on popular fund themes that some distribution platforms may be lacking,” the report said.
The second highest ranked factor was to include a unique fund with an interesting investment strategy. Catering to client demands of popular or successful funds available with other distributors followed next while reasons such as replacing a fund or request from headquarters as part of a global or regional partnership agreement, featured the next.
The Cerulli report entitled Asian Fund Selector:Conflicting Realities examines the role and importance of fund selectors in the distribution process across key markets in Asia: China, Hong Kong, Korea, Singapore, and Taiwan.
The research explores the influencing factors in the fund selection process and market trends driving decision-making, and highlights the interaction between asset managers and fund selectors, describes the expectations both parties place on each other, and outlines the processes and intricacies of fund selection.
Cerulli believes this report would helps asset managers who are struggling to gain access to fund platforms to understand exactly “what fund selectors are seeking – performance is not always the most important factor.”
Last week, Cerulli published a report that highlighted asset managers are exploring new distribution channels
to boost sales, apart from the traditional routes of marketing funds through banks and securities houses.