In October, the China Securities Regulatory Commission (CSRC) launched a pilot scheme to test the investment advisory business in publicly-offered mutual fund investments, in a move to slowly shift away from the traditional transaction-based model to a fee-based model of selling fund products.
The pilot allows managers and distributors to tailor investment options for clients based on their financial status and financial management needs, and charge fees of no more than 5% of investors’ net asset value, according to a Cerulli Associates report.
In total, at least eight firms in China have been given the licence to conduct mutual fund investment advisory services, Hui Miao, Singapore-based senior analyst at Cerulli Associates, told FSA.
The first batch of licences was given to five firms in October, which include E Fund Management, China Southern Asset Management, China Wealth Management (a subsidiary of China Asset Management), Harvest Wealth Management (a subsidiary of Harvest Fund Management) and Zhoung Ou Qian Gun Gun (a subsidiary of Zhong Ou Fund Management).
This month, three more licences were given to online mutual fund distributors, which are Ant Financial, Teng An (under Tencent) and Yingmi, Hui added.
“This is a really new model in China to shift away from the traditional model, where third-party channels get more fees if they are able to sell more funds” a Beijing-based spokesman at China Asset Management told FSA, noting that China AMC’s subsidiary has officially launched its mutual fund investment advisory business this month.
“The new model is based on investors’ outstanding assets and is more in-line with the Western general practice of financial advisers,” he added.
Challenges
The new scheme may provide opportunities for global managers to increase their participation in China’s RMB 13.9trn ($1.98trn) retail fund market, especially since limits on foreign ownership of retail fund management firms are set to be removed in April next year, according to the Cerulli report.
However, players – both foreign and domestic – are expected to face challenges in the new scheme, especially since a fee-based model is new to Chinese retail investors. In addition, knowledge of asset allocation remains low in the country’s retail market, the report said.
For foreign players, Cerulli’s Hui noted that they should need to satisfy certain requirements first before receiving the licence.
“Only licensed [public] asset managers and fund distributors are qualified to apply for this business, and fund distributors must have no less than RMB 10bn in non-money market fund assets,” she told FSA.
“Foreign players need to be one of these two first, and none are qualified so far.”
Vanguard’s JV
That said, Hui provided different options for foreign managers who are not yet qualified to join the scheme.
“At the moment, they can definitely look for partnerships or their joint ventures to tap into this opportunity, or they can focus first on applying for a public fund management or distributor licence on their own before touching on the advisory business,” she said.
Vanguard has become the first foreign players to take on the new scheme. Just recently, it set up an investment advisory joint-venture with Ant Financial to provide investment advisory services to Chinese investors.
However, Cerulli’s Hui noted that it is Ant Financial – not the JV – that was given the investment advisory licence.
“While the licence was given to Ant Financial and the not the JV, it sets the ground for Vanguard or the JV to provide support to Ant Financial’s coming advisory business.
Not all are enthusiastic with Vanguard’s move, however.
Peter Alexander, managing director at Z-Ben Advisers, believes that partnering via commercial agreements is better than having equity JVs.
“There are real commercial merits behind the Ant-Vanguard partnership,” he said in a Linkedin post, commenting about the Vanguard-Ant Financial JV.
“It is the structure, however, that will ultimately prove to be the death knell of the partnership; an equity joint venture where Vanguard is the 49% minority shareholder. The exact same concept was tried before (Ping An Russell Investment), ending in failure with the JV dissolved after just four years due to intense strife between the shareholders.
“For years we’ve stressed the critical importance of partnering via commercial agreements. Doing so is the only way a foreign partner can ensure that the Chinese side will deliver on what was agreed to. And the Chinese side knows this and is why they will, in virtually all instances, insist on the equity JV structure,” he said.
Intense competition
The Cerulli report also noted the intense competition in China’s retail fund market, with only a handful of firms that are able to raise huge assets for newly launched products.
The firms that are able to do so usually have solid distribution partnerships, are backed by a bank or have a good brand reputation, according to the report.
For example, the two managers that raised the most assets for newly launched funds this year were both backed by banks, which are ABC-CA Fund Management and Mingsheng Royal Fund Management, the report said.
ABC-CA Fund Management raised RMB 214bn for its Fengze 3 Year Interval Fund, which was launched in August, while Minsheng Royal Fund Management raised RMB 193bn for its China Bond 1-3 Year ADCB Bond Index Fund, which was launched in May.
Firms having a good brand reputation include China Asset Management, which had the largest IPOs in both the equity-biased balanced fund and active equity fund categories, according to the report.
“This was supported by its consistent outperformance among its peers,” it added.
Cerulli expects that competition will even be more intense in the near future, noting that Chinese regulators are mulling plans to roll out new regulations that will give priority to the best-performing firms.
“A manager told Cerulli that regulators are consulting fund firms on a new supervision system recently. Firms with good long-term performance could be given higher ratings and priority in the fund approval process,” it said.
