Poor market performance combined with net redemptions in China and Korea are to blame for the 3 per cent fall of mutual fund assets in Asia ex-Japan to $1 trillion this year, according to a new report.

According to Boston headquartered analyst firm Cerulli’s Asian Distribution Dynamics 2011 report, assets under management in mutual funds fell by 7.9 per cent in China and 6.6 per cent in Korea, while the other Asia ex-Japan markets grew.

Despite the setbacks this year in China and Korea, Cerulli believes the next five years will see AuM explode in the mutual fund sector. 

Using its projections, Cerulli estimates mutual fund assets in the region will near $1.1 trillion by year’s end and $1.8 trillion by 2015, with a forcasted five year CAGR of 11.2 per cent.

The report said that fund assets in the region comprised of China, Korea, India, Taiwan, Hong Kong, and Singapore, posted a compound annual growth rate of 13.9 per cent from 2006 to 2010. Over the course of this period China had the highest CAGR of 29.4 per cent, followed by India at 17.6 per cent.

Although banks continue to be the major distribution channel for mutual funds in Asia ex-Japan, their share of assets under management has declined to 53.6 per cent as of June 2011. This is down from 54.4 per cent at the end of 2010, and 55.7 per cent at the end of 2009. Regulatory tightening, especially in Singapore and Hong Kong, combined with distribution diversification by fund managers are attributed to these declines.

Closer distributor relations and client communications are the ways for banks to keep their distribution market share in the increasingly important industry, according to the report.

The increased costs and competition in the region has also resulted in the shrinking of operating margins. In China, Korea, and Singapore they are in line with the global average of 31 per cent to 33 per cent. In Taiwan and India the margins were below the global average.

“Asia ex-Japan’s mutual fund market still presents terrific opportunities for fund managers, but the road is far from smooth. For example, the two fastest-growing markets - China and India - are also, ironically, among the most challenging for global fund houses. Offshore funds are not allowed, and investors generally prefer to invest in domestic equities, which local fund houses have a competitive edge in,” said Ken Yap, head of Asia-Pacific research, Cerulli.