While the Russia-Ukraine war triggered wide corrections in investment markets, the knock-on effects of inflation and rising interest rates could have bigger repercussions for the Asia-Pacific mutual fund industry. Nonetheless, retail investors are still seeking the right products to meet their needs.

Overall, the conflict and its fallout have dampened retail investment sentiments, as net new flows into Asia’s mutual funds fell 26% in the first quarter of 2022 from the previous quarter to US$131.1 billion. In Japan, asset managers and distributors believe that investors have become cautious and are avoiding new purchases. However, this is a result not just of the conflict, but also tapering in the U.S. and other developed countries. As such, the industry does not see this as a good time for new fund launches. According to the Investment Trusts Association, the total number of funds launched fell from 206 between August and December 2021 to 131 between January and May 2022. In May, the figure was only nine.

Meanwhile, geopolitical concerns resulting from Beijing’s ties with Moscow have led to investors shying away from Chinese assets, including stocks and bonds. China’s position on the invasion sparked the flight of foreign capital, as its refusal to condemn Russia’s action has put pressure on fund managers concerned about their China exposure.

Among fund sectors, the invasion of Ukraine has particularly unsettled bond investors in Asia, concerned that the possibility of Russia defaulting on its bond obligations would have knock-on detrimental effects on the wider bond market. Data gathered by Cerulli shows that Asia saw significant losses from bond funds in the first quarter of 2022, with net new flows plunging to US$7.8 billion from US$74.3 billion in the previous quarter.

However, in the high-inflation environment, the promotion of real assets, re-emphasis on income, and capital protection are re-emerging as core themes. Segments such as infrastructure investments are in high demand, as investors shield their portfolios from inflation and refocus on income while protecting their investments from asset depreciation.

Although many consensus estimates forecast the current cycle of equity market correction to trough from the second half of this year onwards, investors could continue to seek entry points to revive equity asset portfolios, presenting asset accumulation opportunities for managers. According to the research, China equities, are among the fund strategies chosen by the majority of Hong Kong and Singapore managers to promote to distributors over the next two years, despite a general shift away from the asset class now. In Japan, U.S. equity large cap blend, global equity large cap, and U.S. equity large cap growth saw strong inflows in the first four months of 2022, Morningstar data shows. Japanese investors seek foreign equity funds as they believe such products offer better returns than domestic equity products to cover their post-retirement life.

“Asset-gathering opportunities will continue to emerge as market conditions change,” said Ken Yap, Managing Director, Asia with Cerulli. “What is important is for fund managers to stay nimble and alert to investor demands, even as they take geopolitical sensitivities into account and navigate an exceptionally difficult macroeconomic backdrop.”