The concept of buying to hold is foreign to them, so when they’ve made their killing, they move on to the next money-making opportunity.
While fund managers currently operating in the Chinese mutual funds market are bemoaning the impact of this behaviour on their efforts to raise assets, they seem to appreciate that they cannot expect to pocket a quick fortune and depart the country in the same rapid manner for the next nascent investment market with lucrative potential.
If an old Chinese proverb says that patience and the mulberry leaf become a silk robe, many of the industry’s 52 participants (and counting) must hope that patience and the Chinese funds market will become a silk purse.
Patience, not to mention excellent fund performance and client support, will be required to ride out the competitive challenges faced by existing players and new entrants, both domestic and foreign, from China’s state banks and insurance companies, at least in the short-term.
These institutions with their deep and far-reaching distribution networks, threaten to take massive bites out of a big and slowly swelling asset pool, leaving only a few crumbs for everyone else to fight over.
Already the signs are ominous, with Bank of Communications having raised, through its joint venture with Schroders, RMB4.8bn (€508m) for a new equity fund this year. Another of the big four state banks, ICBC pulled RMB4.3bn into its first equity fund, launched this year through a joint venture with Credit Suisse Asset Management. How do you compete with that? And the insurance companies haven’t yet entered the fray.
Even without the involvement of the state banks and insurance companies, fund managers must contend with a tough business environment.
Research by Fortis Haitong Investment Management reveals that the 10 biggest investment houses in the Chinese funds market controlled 70 per cent of total assets under management at end-September 2005. €300m is the break-even point in the funds market and over a third of the smaller companies are really suffering, according to Ms Lauren Yao, head of marketing at Fortis Haitong in Shanghai.
Because investors are only interested in the next big opportunity, all players in the Chinese funds market, whether they are struggling or not, are under constant pressure to launch new products. A continuing sales pitch for old funds is useless. But here players come up against a number of problems. One is that the China Securities Regulatory Commission (CSRC) will only allow equity funds, fixed income funds, money market funds and exchange-traded funds into the market at present. Another is that due to the length of time it takes to register a new product, only a maximum of two funds can get launched per year. And then if there are over 100 new mutual funds coming on the market every year, asset managers must figure out how to differentiate themselves in a market with a high degree of homogeneity.
Another thorny issue is distribution. It is difficult for fund providers to gain distribution through the large state banks without first giving them a custody mandate, even though there is no legal obligation to do so.
But for those able to overcome these significant challenges, there is light due on the horizon in the form of the Qualified Domestic Institutional Investor Scheme (QDII). This is designed to allow Chinese-based institutions to invest in non-domestic assets. The driver of QDII is China’s rapidly growing foreign reserves. The central government wants to release some of this money to offset the growth of the inflow. However, on account of the sluggish domestic stock market, the CSRC does not want to see any outflow of assets. It is afraid that if the door is opened, money will simply flood out of China and go to Europe or the US. But while the CSRC has been lobbying against QDII, the fund management community is tremendously excited about the business opportunities presented by such a scheme.
China’s new corporate pension schemes or enterprise annuities present a further opportunity for fund managers in the medium- to long-term. Around 60 licences have been awarded to investment houses to manage these new voluntary schemes. Licence-winners, to date, include three European financial groups, ING, Fortis and Deutsche and Canada’s Bank of Montreal.
Again, fund houses will have to be patient. As yet, no enterprise annuity schemes have been launched, while industry analysts say that until government tax breaks are in place, companies have no incentive to act. Even when such pension schemes are launched, it will take a good 10 years to build up the critical mass of assets necessary to make this a profitable business for fund managers.
In the meantime, market participants will have to battle hard to build market share.
Henry Smith, editor,
henry.smith@ft.com
