In Taiwan, there is an absence of a strong relationship between fees and fund sales, according to the study by BNY Mellon Asset Services. Taiwan also has the higher ‘churn’ rate, a practice in which distributors force investors to shift money from one fund to another, to earn higher commissions.
Turnover between funds in Taiwan is increasing as third-party distributors, largely banks, compete for business, the report added.
Retail funds in Taiwan on average charge a higher total expense ratio than those in either Singapore or Hong Kong, irrespective of asset class: 2.01% for equities, 1.62% for bonds, 1.83% for mixed assets and 0.47% for money market funds.
The study looked at the relationship between fund sales and price, product range and performance to determine what factors attract institutional and retail investors.
IIs and fees
For institutional investors, the story is different. There was no clear evidence of a significant relationship between price-sensitivity and fund sales in any of the four markets analysed.
Hong Kong institutional investors pay the highest average fees for equity (1.22% average) and bond funds (0.84% average). However, a few key funds from prominent fund houses could be dominating the market, said the report.
Korean institutional investors enjoy the lowest fund fees across the four markets in equities, bonds and mixed assets by mean average. This appeared to be in line with the country’s regulatory changes to attract inflows of international assets.
Retail segment investment clearly dominates across all four markets, with Korea (24%) the only market in which institutional funds exceed 20% of total net assets compared with Singapore (19%), Hong Kong (13%) and Taiwan (11%), the study found.
Hong Kong retail investors have a preference for a diversified product range and prefer funds that can work through different market cycles. However, there is less product diversity than in its institutional fund market.
Retail investors in Taiwan and Korea prefer a narrow product focus even though the Taiwan retail market offers greater product diversity than Hong Kong.
Singapore retail investors are price-sensitive and demand strong fund performance. Institutional investors in Singapore are driven more by longer-term performance, and investors in both distribution channels look to outperform the benchmark index.
In terms of product choices, equity funds are most popular in the retail markets of Taiwan, Hong Kong and Singapore, while a majority of Korean retail investors prefer bond funds.
Good performers sell well
Investors buy into funds that have shown good results, even though data has proven that past performance is no indicator of future returns. Both retail and institutional markets showed a strong correlation between fund sales and historical fund returns, according to the study.
Across all retail markets, cumulative performance is strongly linked to sales momentum, across one-year, three-year and five-year time periods. All four institutional fund markets showed a very strong correlation in 2014 between three-year performance and sales.
Outperforming the benchmark index appeared to be linked to sales growth as well, particularly in Singapore and Taiwan. However, this was not a key consideration in Hong Kong.