China’s asset managers begin the bounceback after the pain

He says that institutions “are interested to put more money in this market. And even if there is worse to come, they will still put more money in the market. They know, and we agree, that China is still one of the biggest growth rate economies in the world.”

E Fund and Bosera are two of the funds licensed to invest for the National Council for Social Security Fund (NCSSF), a major state institutional investor which serves as a reserve fund for social security costs in the future. Both those fund managers, and many other big names too, have also been quick to try to launch corporate pension businesses, which in China are known as enterprise annuities. “In the last three years we have won more and more mandates from corporates, including some government state-owned corporates and some owned by local governments,” says Li Quan. He says that in 2008 its allocation for these clients was such that they still earned a positive 8.16%. Another early mover in this area has been China AMC, the biggest fund manager in the country, which by June last year boasted 60 enterprise annuity mandates.

Many managers are now moving into segregated accounts as well, with 34 licences issued to do so. Z-Ben calls this “a slowly evolving experiment,” and with RMB3 billion under management at the end of 2008 it is clearly early days.

While the opportunities in Chinese asset management are impressive, it is also an increasingly competitive field. The top names continue to crowd the field: the top five of China AMC (with RMB194.53 billion under management on February 28), Harvest (in which Deutsche Asset Management holds a 30% stake), Bosera, Southern and E Fund between them control about 33% of the market. But beyond them there are a host of other names scrabbling for a foothold. Z-Ben tracks 60 separate institutions including the 32 sino-foreign fund managers, and at the bottom end the asset figures are much lower: RMB1.16 billion at New Century, for example.

“We see more and more competitors entering into this market,” says Li Quan at Bosera. “Competition is going to get more and more severe.” Where once there were only domestic fund houses, there are now foreigners, bank-sponsored fund management groups, and even insurers, with Ping An and PICC trying to either set up fund management capability in-house or buy into existing businesses. “But at the independent fund houses we still have confidence,” Li says. “The recent scares have seen the core competitive advantages becoming more important: good branding, strong management capabilities, stringent risk management control.”

Nevertheless, no fund managers can get around the fact that the big banks still have a major stranglehold on retail distribution. “Distribution is highly dominated by the big three banks in particular and we don’t expect anything to change in the next two to three years,” says Zhang. “You still have to go to ICBC or Construction Bank to have a decent offering of your mutual fund product.” As for insurers, they have tremendous investment assets under management – RMB3.34 trillion by the end of 2008, bigger than the mutual fund industry – and the development of bancassurance products is highly significant for fund managers. Furthermore, the trend in regulation is to give insurers greater freedom in how they invest those assets, from a previously bond-heavy allocation to some exposure to equities. But, even if insurers do buy or develop fund management businesses, they are unlikely to put all of their investment assets through that business, and are still likely to outsource for diversity’s sake.

Joint ventures have had mixed fortunes, but there are some clear successes out there: aside from Deutsche’s Harvest investment, the ICBC/Credit Suisse and Bank of Communications/Schroders ventures stand out (both, notably, are backed not by local fund managers but by local banks; it would not be a surprise to see China Construction Bank’s venture with Principal gaining similar ground). But there are some surprisingly big names a long way down the list in asset terms, such as Morgan Stanley Huaxin and Axa SPDB.

Increasingly, arrangements like these are becoming two-way streets, for while international fund managers want very much to get exposure to the domestic industry, China’s own players want to build their expertise outside. An example was Bosera signing a memorandum of understanding with Singapore’s Fullerton Fund Management in September. The two groups will collaborate on sourcing, structuring and managing funds under China’s two cross-border investment programs, Qualified Foreign Institutional Investor (QFII) and Qualified Domestic Institutional Investor (QDII).