As China slowly opens the domestic market to international players, foreign asset managers are quietly flocking to Shanghai’s free-trade zone to set up the structure that allows them to operate onshore — the investment management wholly foreign-owned enterprise (IM WFOE).
So far, 30 IM WFOEs have been established. With this structure, the managers are eligible to apply for a private fund management (PFM) qualification to distribute funds to qualified (high net worth and institutional) investors.
It is early days for the IM WFOE — Fidelity became the first foreign manager to set up domestically only 18 months ago. But FSA talked to two Shanghai-based general managers of IM WFOEs — Amy Wang at Aberdeen Standard Investments and Mark Li at Fullerton Fund Management — who shared their fund distribution experience in China so far.
Newcomer track record
Fullerton, owned by Singapore state-run Temasek, manages an onshore absolute return fund, incepted in February. The product is distributed in China through Hong Kong-listed brokerage China Galaxy Securities.
ASI became the eighth foreign manager to roll out a private fund in China. In May, the firm chose a consumption-related equity strategy for mainland investors.
Key challenges are fund selling rules and short track record.
Both Li and Wang said that gathering AUM for products is not easy as a newcomer. Each private fund is allowed a maximum of 200 investors.
“The cap on the number of investors limits the total assets gathered onshore,” he said, adding that one solution is to court institutional investors who tend to allocate large amounts of capital. “But it isn’t easy,” Li said.
Mark Li, Fullerton Fund Management
Due to internal compliance requirements, institutional investors select funds with a strong onshore track record. But foreign managers can only demonstrate the performance of an offshore equivalent, which limits institutional interest.
Additionally, institutional investors are facing more stringent regulations due to the government’s pledge to bring down financial industry risk. Thus, financial institutions continue to adopt a wait-and-see attitude toward products managed by foreign private managers.
Therefore, the client base for foreign firms is dominated by China’s high net worth individuals, who are more accustomed to domestic asset managers.
“Despite the fact that we have managed assets globally for years, our onshore track record only starts this year with the launch of the first WFOE fund,” ASI’s Wang said.
“No matter how long the track record you have offshore, [to investors] it is not 100% equivalent to domestic investment capabilities.
Amy Wang, Aberdeen Standard Investment
In order to strengthen the investment capability, she revealed ASI Shanghai will continue to add portfolio managers and analysts who are bilingual and familiar with local culture.
“You have to be patient. Once you can deliver returns to investors, it drives more money to the fund.”
Local vs foreign brand
Brand recognition in China is also a major challenge for global managers. Wang believes the entrance of foreign private fund managers not only involves an educational process for investors but also for distributors.
High net worth individuals — the main target client for foreign WFOE funds — tend to be less familiar with foreign asset manager brands, investment philosophy and practices. “We have to communicate frequently with the distributor about our investment process,” Wang said.
Li, from Fullerton, agreed that domestic investors don’t see much differentiation among the foreign brand names.
“The high net worth investors are able to identify foreign managers as a group rather than by individual names, he said.
Therefore, for its first onshore product, Fullerton partnered with domestic securities firm China Galaxy, which distributes the fund to its client base.
“Effective communication with the distributor is crucial to convey the message to investors about the investment philosophy of a foreign manager and the way that it differs from that of local funds,” Li added.
Apart from PFM funds, onshore entities can also apply for the qualified domestic limited partner (QDLP) qualification.
Unlike the PFM license holders who are permitted to invest onshore, the QDLP managers are allowed to raise money domestically to invest in offshore traditional and alternative investments, including overseas equity and bond funds, hedge funds and real estate.
Currently, ASI is among the licensed QDLP firms. Recent regulatory approvals were given to Allianz Global Investors, Manulife Asset Management and Mirae Global Investments.
For foreign managers, the QDLP scheme has an advantage over the PFM, Wang said. Domestic investors tend to see foreign managers as more credible in managing offshore assets.
“Investors know that global managers are naturally good at managing offshore funds. It is easier for us to market the QDLP products to the target clients than PFM funds. You would not face the challenges in brand recognition that you would when you are selling funds that are invested domestically,” she added.