While these developments are hugely encouraging for international fund managers lining up to take advantage of QDII, the big question is: will they all succeed in keeping hold of their new cash bonanzas?
Under QDII, Chinese investors are allowed to buy foreign assets through a quota issued by the securities regulator to qualifying financial institutions.
Southern Fund Management led the way with the launch of a globally diversified balanced fund which is being sub-advised by BNY Mellon Asset Management. This product launched at a capped $4bn in assets, having received $8bn in subscriptions.
Subsequent QDII fund launches by China Asset Management Company (advised by T. Rowe Price), Harvest Fund Management (advised by Deutsche Asset Management) and China International (a joint venture with JP Morgan Asset Management) raised a total of $34bn between them.
But while the scheme is turning out to be a money-spinner for fund managers, it has given Chinese banks much less to cheer about. According to Shanghai-based consultants, Z-Ben Advisors, none of the larger banks have asked for additional quota which would suggest that none have been able to raise in excess of $2.5bn, the largest quota issued to ICBC, one of the big five Chinese banks.
The reason for weak demand, maintains Z-Ben, is that investors do not consider banks the best institutions to manage their money. The organisations deemed most suitable are fund managers and securities houses respectively. In addition, investors consider the QDII products developed by banks to be more complex. By contrast, the Southern/BNY Mellon QDII product has the structural simplicity and familiarity of a local mutual fund.
The rules applied to fund management companies allow for a greater deal of flexibility with regard to the types of QDII products which can be created. With only a few exceptions, just about any product targeting any asset class is permitted. More investment restrictions are imposed on the banks and opportunities for equity exposure are limited.
So with the regulators smiling kindly on them, are fund managers in pole position to scoop up and retain the $90bn that JPMorgan has estimated will leave China in QDII funds in the next 12 months?
If the IPO mentality that still characterises investor behaviour in the domestic mutual funds market is replicated in the QDII arena, fund managers can probably expect to attract the bulk of their subscriptions at IPO stage but struggle to retain those assets as new QDII funds are launched by rival product-providers.
But QDII fund managers who manage to achieve consistently strong performance will probably stand a better chance of retaining assets.
In the domestic A-share market, strong fund performance is also considered the key to a successful secondary offering of existing funds. According to Denis LeFranc, CEO of Fortune SGAM Fund Management, distributors are more willing to assist with the relaunch of a fund if it has generated strong performance.
Chinese retail investors are on a learning curve and, despite the efforts of fund managers to better inform the distributors meeting the end-clients, it will be some time before investors are judging mutual funds by their investment strategy and process.
“Absolute returns are all that matter to them,” says Mr LeFranc.
Business risk
Notwithstanding healthy mutual fund inflows fuelled by a booming domestic stock market, some joint venture asset managers in China lament the product limitations caused by the absence of a futures and options market and the ability to short stocks.
As long as A-shares continue to rise in value, concerns will be muted and more foreign fund managers will follow recent entrants, Axa Investment Managers and Morley, intent on grabbing their own share of the equity action. But all good things end eventually. A significant market correction would spark large fund redemptions which could mean that those asset managers running only equity funds and with no licences to manage QDII funds or enterprise annuities (corporate pension schemes), would find it tough to survive.
M&A activity would, doubtless, put paid to many of them.
Henry Smith, editor
