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Churning in Asia Cerulli

Added 13th April 2015

Typical product structures that offer superior liquidity and guaranteed returns are encouraging the practice of churning of investments in the Asian mutual fund industry, according to a new study by Cerulli Associates.

Churning in Asia Cerulli

Products offering superior liquidity such as the online money market funds in China and implicit guarantees such as the trigger funds in Thailand, are leading to shorter investment horizons and in turn promoting a short-term investment mentality in Asia, the research said.

Trigger funds set a return target from their inception and cease operating once returns reach the specified target. 

Churning of investments is common in Asia and happens across the board, from investors to distributors to manufacturers, Cerulli said.

"From a pragmatic standpoint, distributors have every reason to promote portfolio turnover as the front-end fees earned are a significant step up from the grind of collecting trailer fees – usually half of management fees – on a quarterly basis," Yoon Ng, Cerulli's Asia research director said.

Apart from the product design, there are other factors contributing to churning. 

Asset managers in countries like Indonesia and China have little incentive to develop products with long-term investment horizons due to the ease in gathering assets by launching new funds.

"Six out of the top ten funds in Indonesia by assets under management were launched within the last five years, while two of the largest 10 funds in China were launched last year," Ng noted.

Independent financial advice could be one of the ways to reduce the practice of churning of investments and increase the investment horizon, Cerulli said.

Holding periods tend to be much longer in Hong Kong and Singapore, where independent financial advice is available, said Cerulli, citing the findings of its recent survey on the holding periods of retail investors in China, Hong Kong, Singapore, and Taiwan.

In an interview with Fund Selector Asia last year, JP Morgan Asset Management’s chief executive Steven Billiet cited churning of investments as a major challenge in Asia.


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