Investor education critical in Asia
High product churn and the ability to meet investor demand for higher income from financial products are among the challenges in Asia, said Alexander Henderson, managing director for Asia, in part two of an interview with Fund Selector Asia.
The short-term trading mentality in Asia is reflected in the average holding period of mutual funds (1-12 months) compared to the US (18-24 months) and Europe (12-18 months), he said.
"Without doubt, my biggest frustration and challenge is the persistency of assets we have. Investors in Asia often use a mutual fund to access an underlying theme and once a profit has been made or the theme looks to be turning, they sell."
"The need for education is critically important. We as manufacturers need to continue to educate investors as well as the advisers [intermediaries]."
A transition to a fee-based compensation model from the current commission-based model will slow the product turnover rate, he added.
New regulatory controls like the Retail Distribution Review in the UK have come down heavily on the payment of commissions to the advisers. This helps to slow the process of active churning of products and also reduces the total expense ratio of a product, he said.
"Advisers should be incentivised to give the best advice, the best return opportunity, and the best risk advice. Intermediaries are then entitled to a fee for this service. That is where the industry in Asia needs to be headed."
The income challenge
In Asia, the income theme has been central to investor portfolios, with high yield bond, credit, equity dividend or a basket of them together, seeing strong demand, Henderson said.
"The challenge we have in Asia is that investors want income as high as possible with regular monthly payments. We try to look at quality companies with good fundamentals that pay, for example, 4% dividend yield. But [for investors] often that is not enough."
In Hong Kong, the focus has been more on US and Europe equities and less on the fixed income story. Singapore is typically more conservative with a preference for fixed income-oriented solutions, he added.
"Taiwan has seen phenomenal flows into high yield credit and European equities. Unfortunately, Taiwanese investors are short term in their horizon and the turnover [of products] can be high.
Recently, Asian investors have been showing increased interest in European property securities, a trend he believes will continue to build due to low valutations in that asset class.
A sampling of Henderson funds that the firm says are gaining traction with investors in the region: