Asia fund industry eyes more bear market products

Asian investors, long used to being pitched mutual funds geared to high-flying stocks, will see more non-equity products on offer this year as the fund industry tries to ensure it can still attract cash if faced with an extended bear market.

With Asian stocks suffering their worst quarterly fall in five years and redemption risks rising, fund industry executives said that they want to diversify product lines and ensure they have alternatives to offer customers who have been spooked by months of equity market turmoil.

"There is now a trend to less risky products, so we are developing some products that serve these needs. That may be in the fixed-income area, that may be in the balanced areas, or absolute return products," Rudolf Apenbrink, the Asia Pacific chief executive of HSBC Investments, told Reuters in an interview.

"Our distributors are also asking us to provide them with things like that," added Apenbrink, who oversees around $60 billion in assets.

Fixed-income funds in Asia range from basic money market funds holding short-term debt to those investing in government and high-grade corporate bonds. Funds investing in high-yield debt, also known as junk bonds, and other complex instruments are much less common. Asian stock markets were hammered in the first quarter on signs of faltering global growth and continued problems in credit markets. MSCI's measure of Asia Pacific equities outside of Japan dropped more than 14%, but has since rebounded by 8%.

Hopes are growing that the worst may be over, but some analysts say the recent rally could peter out as company earnings are likely to remain under pressure at least for the rest of this year.

According to fund tracker Lipper, a unit of Thomson Reuters, equity funds authorised for sale in Hong Kong reported an average loss of 3.85% in March alone, with China-focused funds down almost 13%.

This compared with a 1% rise in bond funds, which investors often seek out as safe havens in troubled markets.

Stock market slides tend to hit Asian fund investors particularly hard as they often make large equity-linked bets, rather than long-term allocations spread over a variety of asset classes, fund executives said.

"Over the past three years, most people bought only equities ... there's not yet a good attitude around true diversified portfolio building," said Evan Hale, managing director of Hong Kong, South Korea, Singapore, and China for Fidelity International.
Without offering details, Hale said the $299.4 billion affiliate of Boston-based Fidelity Investments, the world's biggest mutual fund company, "absolutely" plans to expand its range of fixed-income offerings in Asia.

WARY OF REDEMPTIONS

Fear that investors will withdraw their cash is one factor prompting fund companies to review product lineups, though executives said redemptions in Asia have been surprisingly subdued so far given the sharp market declines.

Data from the Hong Kong Investment Funds Association showed that while gross retail fund sales in the territory were down in the first two months of 2008, gross redemptions were lower as well. This meant the industry was still seeing net new sales, though less than a year ago.

Fund executives said many investors may simply have been caught off guard by the speed of the first-quarter market drop or may feel comfortable holding on because they bought some time ago and are sitting on large gains.

But Hale said there is a risk redemptions will pick up as markets recover because many Asian investors hate redeeming at a loss. This means they will wait for a fund to return to its original value before selling, a common phenomenon in China.

"Now may be the calm before the storm. Chinese investors, especially at the retail level, have shown a tendency in the past to sell out once investments return to par value. Should markets rise, a flood of sales may yet await," Shanghai-based fund consultancy Z-Ben Advisors said in a research report.

A challenge in offering alternatives to equity funds is that many Asia companies, and Asian capital markets in general, are more equity focused than in the United States and Europe.

This means there is a smaller range of fixed-income securities to put into funds, a situation some global money managers hope to change.

"We're working with various regulators in the region to help develop the local bond markets. We think that there's a lot of demand, certainly outside the region, but even within the region for access to the Asia story," Brian Baker, a director with the Asian arm of Allianz unit PIMCO, told a fund conference in Hong Kong.

PIMCO, which managed $746.3 billion at the end of last year, is working to develop a local currency Asian bond product.

The ability to offer non-equity products may be key for global fund firms hoping for long-term success in Asia. Schroders Asia Pacific Chief Executive Lester Gray, whose firm has a 30-year history in the region, said its diversified product lineup has been a major strength.

"We were selling Asian bond and emerging market debt during the last market turndown in 2001-03, and they were products that did fantastically well for us and our investors," he said.

"Now that the risk appetite had backed off again, we're seeing demand for those same products." (Reuters)