The Asia region appears to be as open to the supposed appeal of passive investing as other parts of the globe, a report said.

The age-old debate on the benefits and costs of active versus passive investing has become more heated in Asia as regulatory scrutiny on fees and noise around costs have taken hold, according to Cerulli Associates, the analytics firm. 

A commentary by the Boston-based firm states that an increasing number of traditionally active fund houses are ramping up their passive capabilities, including strategic beta. 

As the company argues, some product manufacturers do not favour passives and often base their arguments on two things. First, greater alpha can be generated in less efficient equity markets such as Asia, versus developed markets. Second, they say that Asia's mostly commission-driven distribution model hampers the popularity of passives, which offer little or no sales incentive.

“With regards to the first argument, Cerulli's findings reveal that active funds investing in Asia Pacific ex-Japan and global emerging market equities have delivered little to no alpha over various time periods. As for the second argument, Cerulli agrees with manufacturers that distribution has been a key hurdle for passive funds, which are still playing catch-up with their active cousins in terms of size and flows,” it said.

Demand for passive funds varies across markets. Apart from Japan and Australia, China was the only market which captured a double-digit share of passive assets under management last year, with the Southeast Asian markets commanding a miniscule share of assets.

“Anecdotal feedback suggests that institutions are driving passive investing in most Asian markets. A clear example is the Bank of Japan, which has been buying exchange-traded funds and stocks as part of its quantitative easing programme to spur the domestic economy. This, in turn, has spurred interest from retail investors. Regulators in Hong Kong and Singapore have also issued guidelines on leveraged and inverse ETFs to broaden their ETF offerings,” the report said.  

Cerulli added that in the long run and across Asian markets, passive product development and demand will likely continue to rely on regulatory and institutional initiatives.

The rise in popularity of passive investments is one of the reasons given for why some kinds of asset management houses will struggle to make a living in the future, as argued last year by Moody's, the ratings agency. (See here.)