Corner Office Views | Q2 2022

Thematic Investing in the Spotlight in Asia

But stickiness of investors remains a concern

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Key Points

  • Thematic investing in Asia has gained massive traction during the pandemic.
  • The general lack of information surrounding sustainability issues creates opportunities for global managers with the relevant expertise.
  • Mixed-asset funds are expected to gain further traction, allowing investors to access multiple themes while offering attractive returns with downside protection, as well as income payouts.

Authored by

Jaslyn Ong

Jaslyn Ong

Research Analyst

Bio →

Jaslyn Ong

Jaslyn Ong

Research Analyst

Jaslyn leads the research for two of Cerulli’s annual reports: The Cerulli Report—Asset Management in Southeast Asia and The Cerulli Report—Institutional Asset Management in Asia. She also contributes to The Cerulli Edge—Asian Monthly Product Trends and generates quantitative analysis to support strategic consulting engagements. Specifically, Jaslyn covers the asset management markets of Hong Kong, Malaysia, Singapore, and Thailand.

Prior to Cerulli, Jaslyn was with the Asia Pacific asset management research team at PwC. Prior to that, she worked briefly with Prudential as a financial consultant during her penultimate years of university.

Full biography here.

Overview

The overall Asian mutual fund industry saw a slowdown in asset growth, at 7.0% in the second half of 2021, compared to the 11.2% gains in the first half of 2021. Nonetheless, Asian mutual fund assets managed to record double-digit growth of 19.0% year-on-year, surpassing the 16.2% logged in 2020.

Thematic investing gained traction during pandemic

In search of higher returns amid the prolonged low interest rates, investors flocked to equity funds in 2021, especially thematic-focused investments. Within the region, equity funds achieved asset growth of 27.9%, the highest among all asset classes, and gathered net inflows of US$155.6 billion.

Asia-Pacific ex-Japan Asset Owners’ Expectations of External Managers in Divesting from High-Carbon Sectors, 2021

Except for China, investors in all Asia Pacific ex-Japan markets shifted their focus from lower-risk to higher-risk products.

Sources: Morningstar, industry associations, Cerulli Associates | Analyst Note: Singapore data includes only locally domiciled funds.

In fact, Asia-domiciled global large-cap equity funds posted positive monthly net inflows throughout 2021, which accumulated to US$42.8 billion, based on Morningstar data. With the technology sector forming the largest constituent of the S&P 500, at 28.7% based on its January 2022 factsheet, it is unsurprising that a similar trend was spotted for technology sector equity funds, where positive monthly net inflows during the year aggregated U$13.3 billion.

Overall, thematic investing has gained massive traction during the pandemic, evident from the net inflows of US$19.8 billion and US$19.3 billion gathered in 2020 and 2021, respectively. Managers launched 112 sector equity funds domiciled within Asia in 2020, and another 198 such products in 2021.

To manage downside risks, more managers are also rolling out mixed-asset fund products that invest in multiple themes, although most of their underlying investments are still invested in sector stocks. Particularly in China, numerous such products have been launched over the past two years, investing in themes such as technology, healthcare, China’s new economy, and semiconductors.

However, the stickiness of investors in these funds remains a concern, and as thematic funds are typically used for shorter-term bets, this runs the risk of investors booking profits after gains. Furthermore, returns slipped in 2021—for instance, technology sector equity funds in the region saw median yearly returns plummeting from 47.1% in 2020 to 9.3% in 2021. There was a similar trend with healthcare sector equity funds, whose median yearly returns dropped from 23.9% to 1.2% over the same period.

Growing acceptance of sustainability

That said, investors are expected to continue to show interest in thematic investing, particularly for themes focusing on long-term structural changes such as technology, healthcare, and sustainability. Specifically for environmental, social, and governance (ESG)-related themes, Cerulli has noted the popularity of sub-themes such as climate change, electric vehicles, and clean energy.

With the active push for net-zero transition by 2050 under the Paris Agreement, more Asian markets are following their European counterparts in developing their green finance sectors and guidelines to standardize and align environmental risk measures and disclosures to the local context. In markets such as Taiwan, Hong Kong, and Singapore, managers are now required to provide detailed disclosures of their ESG risk measures, methodologies, and outcomes.

Local managers in emerging Asian markets such as Malaysia and Thailand have been heavily relying on global managers via subadvisory partnerships to roll out ESG-related products to investors.

Following political and regulatory tailwinds, managers in Asia are increasing efforts to integrate ESG in their investment processes, especially from a risk management standpoint. The general lack of information surrounding sustainability issues creates opportunities for global managers with the relevant expertise, especially for those based in Europe, where ESG regulations are most developed. Distributors are keen to onboard ESG products to their shelves, with some private banks and robo-advisory platforms curating ESG-related portfolios for their target investors. In addition, local managers in emerging Asian markets such as Malaysia and Thailand have been heavily relying on global managers via subadvisory partnerships to roll out ESG-related products to investors.

Global managers such as BlackRock, Schroders, and Robeco are setting up Asian ESG hubs, while others are expanding their scope into social issues such as diversity and inclusion (D&I), and human empowerment. In fact, Cerulli’s survey last year showed that D&I and employee well-being are among the top five ESG risks that asset managers evaluate in their investment processes, albeit mostly driven by the ESG investment needs of institutional investors.

Conclusion

Cerulli expects thematic investing to regain its momentum in 2022. It is also important to bear in mind that product innovation and investor education will go hand in hand to ensure steady traction in thematic strategies over the longer term. In the meantime, investors are likely to seek safer bets in mixed-asset strategies to reap the upside potential with downside protection.

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