Mutual
funds can gain access to a larger slice of Asian investor wealth, if they carve
opportunities out of several long-term developments, according to a new report
from Cerulli Associates.

The Asia-Pacific region is dealing with intensified regulations,
pressured revenues, narrowing distribution, reluctant inflows, and many other
challenges. However inevitable changes in regulation will expand investment
opportunities. Demographic and market developments will facilitate sales of
products that do not currently have a strong presence among Asian investors,
according to the Boston-based research firm.

Asian investors will likely soon have an expanded repertoire of
asset classes and fund structures because regulators recognize investors’ need
to diversify their risk and hedge exposures. This is already happening in
Thailand, as its provident funds will now be able to invest up to 15 per cent
of net asset value in commodity funds, infrastructure vehicles, and other alternative products.

In the longer term, China is likely to tread a similar path,
despite the fact that the China Securities Regulatory Commission has so far
refused to let mutual funds expand their product range beyond long-only
equities and bonds, most of which are Chinese. This domestic-centric nature has
long-term implications for investors (Chinese stock markets are inherently
volatile and the accounting practices of some Chinese companies’ are dubious).

Cerulli believes that eventually, Chinese regulators will
conclude that it is in investors’ best interest for the mutual fund industry to
have more room to maneuver. In fact, Chinese regulators recently gave
permission for seven exchange-traded funds to use margin trading and
short-selling.

“If that initial run goes satisfactorily, more ETFs will be
allowed to do so, and this may eventually pave the way for long-short funds,
such as UCITS,” said Shiv Taneja, director atCerulli Associates.

Another opportunity exists in the fact that throughout Asia,
people are living longer. Combine that with the new norm of financial market
volatility, unpredictable inflationary patterns, and in increase in the sheer
number of financial products.

“These developments point to opportunities for fund managers to
offer their skills to specialized market segments with specific needs,” said
Taneja.

Inflation-protected funds are one
example of this concept. These funds are currently a less popular proposition
outside Australia, where assets under management was $1.2 billion in 2010.

However, Korea-domiciled
inflation protected funds’ AUM expanded to $23.8 million in November 2011, from
$5.1 million in 2010 and $2.3 million in 2009. China’s inflation-protected
funds have also followed an upward trajectory.