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Asian distributors likely to include passive index-tracking funds in future portfoliios
Fund distributors in the Asia-Pacific region will increasingly look to have two mutual fund lists with passive funds as “core building blocks,” US-based analytics firm Cerrulli Associates says.
The Asset 30 Jun 2015
Fund distributors in the Asia-Pacific region will increasingly look to have two mutual fund lists with passive funds likely to be the  “core building blocks” of future portfolios, US-based analytics firm Cerrulli Associates says.
 
Currently, distributors typically have a single, all-embracing fund list to serve the needs of their customers.
 
There are two main factors underpinning this trend. First, there is anticipation that regulations from the United Kingdom's Retail Distribution Review (RDR) or Europe's Markets in Financial Instruments Directive (MiFID) will trickle down to Asia.
 
"These regulations, which give greater clarity on products, services, and fees, will revive the age-old debate of active versus passive investing as investors gain a clear understanding of what they are paying for," says Shu Mei Chua, an associate director with Cerulli, who led the report.
 
In Asia, there is a general consensus in the industry that similar regulations will eventually make their way into the region. Regulators in Asia have been moving in that direction in the last few years with the clamping down on mis-selling practices, strengthening of product sales processes, and improved transparency of sales commissions.
 
Second, investors will be unwilling to overpay for a passive fund in an active disguise. After all, academic research has long postulated that most active managers do not, on average, beat the market, especially after costs are factored in. Investors are also becoming more digitally and investment savvy, and are able to compare differentials in fund fees across fund providers and distributors.
 
"The divergence between alpha and passive investments will lead to increasing demand for low-cost, passive investments, and distributors will respond with two fund lists-an evergreen, passive product shelf, and a satellite list of actively managed funds," Chua says.
 

As such, exchange-traded funds (ETFs) and other index-tracking funds will form the basic building blocks for model portfolios. Alpha-generating products, on the other hand, will be the icing on the cake, coming at a premium for those who seek above-market returns.

 

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