Product diversity is growing in Southeast Asia ex-Singapore’s fund industry as asset managers prioritize product development, according to new Cerulli’s research.

Cerulli’s survey of Southeast Asian fund managers this year shows that they consider launching innovative products as highly important not just in 2022, but also in the next three years. Indeed, there is scope to issue new fund offerings in the region as economies recover from the pandemic. Investors are showing greater interest ins exploring new funds and strategies as they seek to grow and diversify their portfolios, especially in the continuing low-interest-rate environment.

There is also opportunity to work with local fund managers and distributors to launch or market new products. In particular, fund managers Cerulli surveyed are focusing on global equity and fixed income; environmental, social, and governance (ESG); alternatives; and China equity for their product partnership strategies in the region. Partnerships through sub-advisory arrangements were the most preferred by survey respondents (50.0%).

Greater China funds have attracted a lot of money as China led global economic recovery and was expected to continue its rapid growth, buoyed by sectors such as healthcare, technology and innovation, and consumer services. At the same time, interest in sustainable products is also growing among Southeast Asian investors. Cerulli notes that increasingly, more asset managers in Southeast Asia ex-Singapore are embracing ESG investing and trying to implement ESG considerations to existing funds or incorporate ESG filters in new ESG funds.

The rising share of the region’s foreign-invested fund assets in the past two years indicates a growing realization among investors of the need to diversify their assets beyond their local markets. Thailand, for example, had 28.9%—or US$36.9 billion—of its total mutual fund assets invested in foreign funds at the end of 2021, up from 25.5% in 2017. This steady expansion of foreign investment funds indicates a long-term trend of outward-looking investment activities among Thais. This provides opportunities to foreign asset managers and has led to many of the largest master-feeder partnerships in Southeast Asia. It has also produced some of the most diverse feeder fund alliances between local and foreign managers.

While the master-feeder structure remains a dominant route for getting foreign exposure, direct offshore investments are gaining ground and paving the way for overseas managers to market their funds without having to forge product partnerships. This is partly due to the growing number of options to invest offshore directly. More such partnerships can be expected for both locally domiciled funds and direct offshore funds, given the fast pace of Thailand’s digital adoption.

“Liberalizing the fund market will encourage product innovation to attract new investors, especially younger cohorts,” said Shannen Wong, senior analyst with Cerulli. “In contrast, restrictions on foreign investments have limited investors’ product options, as well as fund managers’ abilities to meet investors’ expected returns and to offer diverse funds. Overall, diversifying the array of products as well as the channels that they are offered through can only bode well for the growth of the mutual funds industry.”