Product churn plagues Asia fund industry -execs

By Jeffrey Hodgson

HONG KONG, April 15 (Reuters) - Mutual fund buyers in Asia are churning products at a higher rate than U.S. and European investors, a trend likely to crimp profits in the high-growth region for years to come, fund industry executives said on Tuesday.

The rapid buying and selling of funds, and willingness of many firms to cater to hot investment trends, could damage the industry's long-term prospects, as the practice typically eats into returns and costs investors money, they warned.

"Probably the biggest problem we have as an industry overall is that in general our clients are not making a lot of money," Blair Pickerell, head of Morgan Stanley's (MS.N) Asian investment management arm, told the FundForum Asia conference in Hong Kong.

"If you look at when people got in they tended to get in at the top, which suggests that clients are probably losing money more than they're making money, even though the markets have generally gone up over the last 20 years."

Lured by high savings rates, robust growth and favourable demographics, global fund houses have been stepping up their investment in non-Japan Asia in recent years.

But while growth in assets under management has outpaced the larger U.S. and European markets for much of this decade, many firms underestimate the complexity of making money in the diverse and still maturing region, executives said.

"Many markets are thematically driven, and these investment themes can switch very quickly. There is little ... consistency in the type of fund that attracts the majority of flows in each market," said Lester Gray, the Asia-Pacific chief executive for UK fund house Schroders Plc (SDR.L).

"This month it may be commodity. In three months time it might be infrastructure. Three months after that it might be emerging market debt."

The Singapore-based fund executive cited a report that U.S. investors tended to hold on to a mutual fund investment for more than five years, compared with just over a year in Hong Kong and South Korea, and less than a year in Taiwan and Indonesia.

He said this is partly due to the lack of tax-favourable savings schemes in many markets, compared with U.S. 401(k) retirement plans.

The fee structures on many products may also be an incentive for distributors to push investors into new funds, executives said. They also blamed the "trading mentality" of Asian investors, who often treat fund products like a stock or hot initial public offering, rather than a long-term investment.

"If you perform very well, which means they made a very quick profit, you actually get punished because they want to take profits. It's a dilemma ... It's very hard to tell people to sit on their profit," said Stella Chua, a regional investments product director with Citigroup (C.N).

Some fund executives said given the harsh reality underneath the region's seemingly bullish prospects, there may be international money managers who simply write off early investments and quit the region.

"The last two days, all I've heard about is the low durability of those assets. At the end of the day as asset managers, we get paid to manage assets, and those assets have to stay on the books," said Erich Gerth, who heads the international arm of Janus Capital Group Inc (JNS.N).

"As you close funds as quickly as you open funds, you have to ask yourself, is that a sustainable business model?" (Reporting by Jeffrey Hodgson, editing by Will Waterman)