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China onshore funds fueled by institutional demand

The upcoming launch of mutual fund of funds as well as banks outsourcing more wealth management products (WMPs) to asset managers should help grow onshore fund assets, analysts said.

The China Securities Regulatory Commission issued guidelines on introducing mutual FoF products last Friday after a consultation in June.

Demand for mutual FoFs “would mainly come from institutional investors in the first stage as institutional clients are more sophisticated and understand FoFs are a long-term investment vehicle with [specific] asset allocation characteristics,” said Rachel Wang, Morningstar China’s director of manager research.

To meet investor demand and the risk appetite of banks, which are the key distribution channels, the new FoF products are likely to set a reference yield and employ a low risk strategy that aims for stable returns, she added.

Such products hope to address the demand for multi-asset funds in China. Recently there has been a shift of demand to fixed income funds from the traditionally popular money market funds and equity-focused products.

“The yield of money market funds is simply too low at the moment, fetching only slightly above 2% [annualised return],” Wang noted.

Meanwhile, there are also more new mutual fund products tailored to institutional investors, she said. “Some of those funds, such as fixed income, finished fundraising within a week.”

Institutional investors represent 52% of the onshore mutual fund market as of the end of June, according to a Fitch report. Institutional capital has flowed mainly into money market funds and balanced funds, it noted.

Outsourced fund management

Banks in China are increasingly outsourcing the management of their wealth management products to investment managers, the report said.

China’s mandates and subsidiary fund businesses, which are benefitting from the outsourcing trend, hit RMB 5.4trn and RMB 11.1trn, repsectively, as of June.

“Faced with a substantial growth of [wealth management] products, they are looking for scalable and professional investment capabilities. This contributed materially to the mandates’ assets growth,” the report said.

The total assets of China’s WMPs were RMB 26.3trn ($3.9trn) as of June, according to a statement from the China Banking Wealth Management Registration System.

Onshore mutual fund assets were small by comparison. Nonetheless, they reached RMB 8.52trn, a record high, as of August.

Ivan Shi, head of research at research firm Z-Ben Advisors, noted the institutional demand is mainly driven by banks, “both their wealth management product assets and their proprietary investment parts.”

“One reason for why such institutional investors are also turning to mutual funds is that the taxation exemption policy is a lot more clearer on mutual funds than on segregated accounts,” he explained.

Part of the Mark Allen Group.