Carte blanche – Alfi 2021

Fund distribution in China – Challenges and opportunities

Eleanor Wan, CEO of BEA Union Investment Management Limited. (Photo: BEA Union Investment Management Limited)

Eleanor Wan, CEO of BEA Union Investment Management Limited. (Photo: BEA Union Investment Management Limited)

The fund industry in China is relatively young, about 20 years, while the European markets have a much longer history and are well structured. That being said, the significant growth in assets under management (AUM) and rapid industry development provide huge opportunities for international players to tap into the growth opportunities.

Why China? Promising future for fund investment

The outlook for China’s mutual fund industry is positive. McKinsey, the global consulting firm, boldly projected China’s total AUM will reach US$30 trillion by 2025, maintaining an annualized growth rate of 18%, on the back of the favourable capital market reforms. While the AUM numbers and growth rate look impressive, the fund market is still far from its optimal since the penetration rate of mutual fund holdings out of the total savings is fairly low in China. In 2014, the mutual fund penetration was only 7% out of the household savings, which was significantly lower than that of Western and other major Asian counterparts. The relatively low penetration rate presents both opportunity and challenge to fund managers. On one hand, fund managers have to think about how to access Chinese retail investors and get them to put money to their funds; and the opportunity lies on the high upside potential for asset growth.

Another possible catalyst could be the huge surge in middle-class numbers in the country. Fueled by the factors including large scale urbanization and rapid economic development, the expansion of middle class in China has been burgeoning in terms of scale and pace. Back in 2000, the share of middle class of China’s population was around 3%; however, in 2018, the proportion had rocketed to over 50%, amounting to more than 700 million people. With higher purchasing power, the rise of middle class surely drives the demand for consumption, and not to forget, the wealth management solutions. This emerging segment, comprising individuals who are highly after investment diversification and capital appreciation, has already been seen as a powerful driver for fund investment in the past years.

The strong GDP growth in China, compared to the West, also accelerates the middle-class expansion and further raises their income level. All in all, China is going to have increasing numbers of middle income households which need financial tools to manage their wealth, rendering large, exciting market opportunities for both domestic and international fund managers.

Understand the investors – what are they looking for?

Before stepping in or expanding in China, it is of paramount importance that international fund managers have a detailed understanding on their target investors, the distribution landscape and the business opportunities that they can ride on.

As aforementioned, the fund market in China is young, in other words, still in developing stage. Retail investors are relatively inexperienced and tend to be speculative. Traditionally, Chinese has a culture of saving in bank deposits and wealth accumulation by investing in properties, which are perceived as “safe” and physical. This behavior has not changed much as of today, though we are seeing domestic investors have more appetite for diversified investment options. These investors are relatively new to other wealth management vehicles, such as mutual funds, a concept that was only brought in 20 years ago. Thanks to the rapid economic development and capital market reforms, they are becoming more open and willing to tap into a wide range of financial products and investment concepts although their investment experience might be limited. Nevertheless, investors are searching for investment products with high returns in Renminbi terms. Due to capital control, the Chinese capital market remains a domestic market. Retail investors are therefore only exposed to China A-shares and bonds or local names that they are familiar with. It is a home-bias market. With the gradual opening of the market through special schemes granted to Hong Kong financial players, e.g., Qualified Domestic Institutional Investors (QDII) and others, Chinese investors are starting to experience investment products from non-Chinese financial institutions.

Technology also plays a key role in China’s retail fund investing market, disrupting the traditional way of doing businesses.
Eleanor Wan

Eleanor Wan,  CEO,  BEA Union Investment Management Limited

In general, Chinese investors are aggressive and very much chasing for high return. There was an equity-focused balanced fund which was introduced earlier this year in China that pulled in US$36.6 billion in a day, on the back of investor’s anticipation that it would provide attractive return as it was run by a celebrity manager. Star managers usually hit the headlines in China’s financial news. Many retail investors make decisions based on the ranking of the fund managers. Not only did this kind of news reflect the heightened demand for active fund strategies, but also explains why the time horizon for fund holding is generally shorter as some Chinese investors tend to take profit and get quick wins. Mutual funds are normally sold at Initial Public Offering (“IPO”) which are priced at RMB1 to start.

Technology also plays a key role in China’s retail fund investing market, disrupting the traditional way of doing businesses. In 2013, Alibaba launched Yu’e Bao, referring as “leftover treasure” in Chinese, was the fastest-growing and largest money market fund managed by Tianhong Asset Management, another subsidiary of Alibaba, that once raised around US$262 billion in assets in 2018. Yu’e Bao sits directly in the Alipay mobile wallet app, accepting the minimum subscription of RMB1, which is equivalent to around US$16 cents. The fund targeted to absorb the leftover cash in the payment app stored by millions of users. The immense growth and remarkable success shocked the industry experts around the world, though the fund size shrank by 18% in the first three months this year following the risk concern from the regulatory body. One year after the launch of Yu’e Bao, Tencent, a head to head rival of Alibaba, rolled out a fund on the WeChat platform where investors could directly inject money to the fund, namely Licaitong, which was managed by another large mutual fund manager, China Asset Management Co. China’s financial market has been dominated by large banks for a long time, however, these two examples demonstrated that online platforms started to find their way to enter the industry with the leverage of technology.

Is there a room for foreign fund houses?

China’s mutual fund industry is dynamic and highly competitive, but its strong growth potential attracts a diverse range of domestic and global fund managers to participate in the market.

For a long period of time, China’s fund market has not been opened up to foreign players. Joint-venture partnership with Chinese companies with shareholding of not more than 30% is to gradually increase to over 50%. Until 2016, global asset managers were first permitted to form fully owned private fund units offering private funds to accredited investors. Therefore, homegrown fund houses, particularly the giant names, have been overwhelmingly dominating the industry and managing most of the assets for many years. It looks like the domestic fund managers are unbeatable, contributed by their experience and popularity among the investors. Last year, China further liberated the market by abolishing foreign ownership restrictions on fund management companies. The deregulation welcomed the foreign managers to venture into the market with full access. An array of international fund players have then applied for setting up a wholly-owned fund management company and BlackRock was the first successful fund house to receive an approval. Further successful applications were underway by other global players and yet to see how successful in their public fund raising.

Some might argue that it is still hard for global companies to win the tough competition against the Chinese rivals. It takes time for them to grow big. Yet, success is largely depending on their ability to establish their brand strategies to build trust with investors. Also, the rapid growth in private wealth should allow more players to participate in this market. Product suites and solid performance are crucial factors to gain interest and confidence from retail investors. These investors also expect to get exposure to fund products tapping on overseas markets for the purpose of comprehensive asset allocations. Hence, they are eager to invest in products that were not available in the market before.

The distribution landscape – diversified channels

Traditionally, banks are the key distribution channels for mutual funds. As discussed earlier, online channels are booming, potentially posing threats to the banks. We believe both bank and online platforms will still grow in parallel.

The rapid development of online sales channels will likely push the banks to upgrade and revamp their online portals, however, banks are too substantial to be replaced. The bank network is undeniably extensive with wide client base. They understand their clients’ preferences and maintain good customer relationship. These elements of human touch are indispensable in the face-to-face sales process, which could not be provided via the online platforms. Self-directed channels will work better for simpler investment products for which retail investors do not need extra guidance.

On the other side, digitalisation is undoubtedly thriving, especially on the backdrop of Covid-19. People are more and more getting used to employ digital ways to do things, including managing wealth. In recent years, the abundant emergence of online platforms, such as Tiantian Fund Sales and Howbuy, is reshaping the fund sales model because of their quick and deep penetration.

Foreign managers need to formulate their distribution strategy, perhaps taking advantage of both traditional and emerging channels, to maximize their fund exposure.
Eleanor Wan

Eleanor Wan,  CEO,  BEA Union Investment Management Limited

Ant Group, the affiliate of Alibaba, beats all big banks and securities firms in China to become the largest fund distributor in the first quarter this year. The announcement reaffirmed the strength of the independent fund advisers that sell funds via online channels, including mobile apps. The top ranking of Ant Group also proved their distribution strategy was successful. Ant Fortune, the group’s online distribution platform, was actively promoting short term bond funds and fixed income products that were responding to the market trend quickly and in an easy way to understand.

We expect this trend will continue and the competition between online platforms and banks might be fiercer. Online portals are highly possible to take up increasing market shares. Foreign managers need to formulate their distribution strategy, perhaps taking advantage of both traditional and emerging channels, to maximize their fund exposure.

Unlock cross-border opportunities

Hong Kong has always been regarded as the window for the mainland financial markets, connecting the Chinese investors to the foreign investments. The integration between two locations is getting closer, fostered by the supportive policies to facilitate bilateral, cross-border capital flows and enhance market liberation. The increased connectivity expands the opportunities for foreign players to access the mainland’s market through Hong Kong.

A series of initiatives have been launched in recent years to open up the market. Programmes for qualified institutional investors (such as QDII, QFII and RQFII) allow foreign money to be injected to Chinese assets and the other way round, i.e., Chinese investors to buy offshore assets. Each programme requires respective licenses and/or quotas. Another pioneering initiative is the Mutual Recognition of Funds (MRF) scheme, giving rights to Hong Kong and China domiciled funds to be distributed in each other’s markets. It is said to be one of the major initiatives to boost Hong Kong as a fund management center.

Wealth Management Connect scheme in the Greater Bay Area (GBA) is a rising star with high anticipation from the industry in both Hong Kong and the mainland. The GBA encompasses an area including Hong Kong, Macau, Guangdong and seven other southern cities in China, with a combined population of over 70 million, which is twice the size of California, bigger than France or the UK, and has a total gross domestic product of around the same as California. The objective of the development is to provide borderless, seamless access to a wide range of goods and services, including financial services. Due to Covid-19, the exact roll-out timeline is yet awaiting but is certainly an important long-term financial scheme for China.

We expect the product suite available in the mainland market will be enriched with the addition of a variety of offshore funds via the cross-border initiatives. When devising the China strategy, Hong Kong is definitely an essential factor to consider.

Successful factors to construct an effective fund distribution strategy

After understanding a big picture of China’s fund industry, here comes the key question for global firms: how to successfully navigate the dynamic market and construct an effective distribution strategy? First, right products are of foremost importance. Right products mean the products that meet investors’ demand and are able to fill the market gap. As explained earlier, the domestic investors in China are looking for investment strategies and capabilities that are currently not available in the local markets. Foreign fund managers should seize the opportunity and showcase their expertise in managing funds that are investing in global markets or particular sectors or asset classes, which can help domestic investors to diversify risks. They are also looking for products that can quickly respond to macro investment themes as well as policy updates. As such, fund managers should take into account the investors’ appetite when designing the products. Speed also counts a lot.

Fund companies need to set out robust yet well-planned marketing strategies to catch up with the vigorous and evolving development in China.
Eleanor Wan

Eleanor Wan,  CEO,  BEA Union Investment Management Limited

Relationship management is also a key to success. It is crucial for global players to strategically team up with local distributors, while there are many options, and maintain good relationship with them. If fund managers go for the traditional bank channels, they have to ensure the banks understand the edge of their products and the core messages are conveyed correctly when engaging with customers. Aside distributors, foreign fund houses are also encouraged to put effort in managing relationship with regulators so that they can keep abreast of timely industry updates.

To upgrade brand awareness, fund companies need to set out robust yet well-planned marketing strategies to catch up with the vigorous and evolving development in China. It might be alarming to find out that fund managers advertised through live streaming Key Opinion Leaders (KOL) on e-commerce portals. This act started during Covid lockdown, which has blurred lines between advertising and entertainment, and has been prohibited by regulator’s recent introduction of reputational risk guidelines. However, it is an indication of the need for fund managers’ involvement in fund marketing, which is not a common practice in the fund industry. Nevertheless, digital marketing is among the top priorities for most fund managers to stay competitive. Be creative, bold and agile.

All in all, China’s fund industry has undergone immense structural changes for the last 20 years. It was only a small portion of China’s financial market at the beginning, but it has gradually become an integral part of the world’s second-largest economy. The rise of middle class and wealth level pushes the demand for wealth management strategies to a new high. We believe, with a well-planned strategy, it is a good time for foreign fund managers to explore opportunities in this compelling market.