Asian and European asset managers must improve their ability to retain client money although they are diversifying sources of income by moving into new markets, Cerulli Associates, the research firm, says in a new report.

Asian and European asset managers must improve their ability to retain client money although they are diversifying sources of income by moving into new markets, Cerulli Associates, the research firm, says in a new report.

The problem of asset retention is particularly acute in Asia, the report said. Firms with new products may raise significant assets under management at a launch stage, only to see assets dry up after that.

Investors typically hold their funds for short periods of less than a year. In Taiwan, for instance, retail investors hold their funds for about six to nine months, while in China the holding period can be as brief as one month, the Cerulli Associates report said.

China is widely seen as the retail fund market with the biggest potential in Asia, but all fund types launched in 2012, with the exception of exchange-traded funds, showed a fall in assets by end-June this year. The asset retention rate was worst for equity and balanced funds, at 17.8 per cent and 12.8 per cent, respectively. The average AuM of equity and balanced funds launched last year also fell by June this year - from an average IPO volume of RMB700 million (around $113.8 million) and RMB1.2 billion, to an average AuM of RMB100 million each by end-June.

Short-termism even pervades a developed market such as Japan, and recently, this has had a lot to do with investors shopping around for mutual funds that offer the most attractive regular income features.

"In Japan monthly dividend-paying funds represent close to 70 per cent of locally domiciled mutual fund assets, with AuM of ¥36.4 trillion ($370.2 billion) as of July this year," said Yoon Ng, a Cerulli associate director.

Europe

Within Europe, Germany and Switzerland are the key distribution targets for managers, with their powerful institutional investor base, followed by Italy and Spain (seen on a par with the United States) and then France (ranked alongside Australia).

However, raising assets and retaining assets do not go hand in hand. Since 2005, the annual redemption rate for cross-border funds in Europe has ranged between 48 per cent and 97 per cent. In the US, the range is between 24 per cent and 36 per cent.

"A Cerulli survey of 153 fund selectors found that asset managers are failing to communicate their investment philosophy to buyers, an omission that is especially costly during short-term underperformance when a deep understanding of the managers' process can help retain the client," Barbara Wall, a Cerulli director, said.

"To offer the highest monthly dividend payments possible has become intense, and dividend-seeking investors will often chase the highest dividends without understanding how they are sourced."

Other findings

According to a Cerulli survey of U.S. managers a significant majority of respondents (85 per cent) that offer traditional hedge funds also offer '40-Act alternative products, and the number of hedge fund providers adapting their products in a mutual fund vehicle continues to grow. Many hedge fund managers are motivated to leap into '40-Act funds due to increased regulation.

Performance fees are a growing regulatory battleground in Europe. In many cases, annual management fees are being raised slightly to compensate for the loss of performance kickers. Cerulli has previously reported just how few absolute return managers actually deliver returns of a positive nature on a regular basis. Frankly, there is little point having a performance fee that merely rankles investors and advisors if you never deliver the performance in any case.

In a Cerulli survey of international asset managers, firms were asked which metrics they used to track their sales team activity. In Europe, numbers of meetings, meetings with specific firms, and hit ratios for requests for proposals were used most often, by around 80 per cent of respondents.