Chinese investors to shift away from WMPs

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Chinese investors are expected to move away from banks’ wealth management products towards products managed by asset managers, according to a report by Oliver Wyman, a consulting firm.

Chinese investors to shift away from WMPs

Currently, 61% of China’s $19trn invested assets is managed by “quasi asset managers”, according to the report. They include bank, which issue wealth management products (WMPs), and trust companies.

WMPs are substitutes for bank deposits. They invest into products issued by trust companies, securities companies and subsidiaries of fund management companies, which funnel the proceeds into loans for corporations, according to the report.

Oliver Wyman expects that the value of the assets managed by these quasi asset managers, $11.5trn in 2017, will continue growing and surpass $15trn by 2022. Their share of the industry, however, will decline to around 50% as investors shift into products managed by professional asset managers. Such products include mutual funds, private funds for high net worth individuals and institutional investors, and segregated accounts.

Total AUM of China’s asset management industry

Source: Oliver Wyman, AUM in trillion US dollars.

Professional asset managers managed around $7.4trn in assets at the end of 2017. This amount is expected to nearly double to $14trn by 2022, and to account for around 15% of the global asset management market, the report noted.

WMPs became popular among investors because of the yields they provide and the perception that they are risk-free. However, their appeal is starting to wane, the report noted. The yields of WMPs have started to drop as China’s economic growth is moderating and the regulators have started to scrutinise such products, according to the report.

“Recent asset management regulations will fundamentally challenge several issues observed in China’s asset management industry: the implicitly guaranteed nature of bank wealth management products, the multiple layers of products nesting between different types of wealth and asset management products, and the significant maturity mismatch between investment products and invested assets,” the report said.

The PFM route

The report also noted that the high net worth individuals (HNWI) segment is expected to grow faster than the mass affluent and the retail (“mass”) segments.

The total investable assets of HNWIs are expected to more than double to reach $17trn by 2022. By comparison, the investable assets of the mass and mass affluent segments are expected to increase by 75%.

Source: Oliver Wyman

In line with the growth of the HNWI segment, the report suggests that running a private fund management business via the investment management wholly-foreign owned enterprise route (IM WFOE) and applying for a private fund management (PFM) licence is “the most tangible route” for global asset managers looking at opportunities in China.

A private fund management business caters only to HNWIs and institutional investors. Assets in the private fund industry reached $2.16trn in January, according to data from the Asset Management Association of China.

The report noted that 65% of private fund assets are sourced from HNWIs.

There are at least 26 IM WFOEs in China, with Eastspring Investments the latest to set up such a presence. Eleven of those IM WFOEs already have PFM licences, with seven products already launched in the private fund industry.

“Global managers wanting to be successful in China will unavoidably have to adapt and be open-minded to ‘execute strategy in uncertainty’, which means they should act fast to seize tangible entry opportunities made available,” the report said.

However, challenges await global fund managers planning to enter the private fund market. For example, the majority of Chinese HNWIs chase short-term returns, which is unfavourable for global managers that advocate long-term performance, according to the report.

Global managers may also have to pay high fees to distributors. Incentive fees could amount to as much as 50% of the ongoing management fee, the report added.

The variety of products for which demand exists in China is also limited. Equity long strategies remain popular in China’s private fund industry, with equity long/short strategies being still nascent.

The low diversity in investment strategies is due to the lack of financial instruments such as options and the inefficient capital market structure, the report noted.

Short selling, for example, is discouraged by regulators and not common. In addition, the domestic market is isolated from the global markets due to capital controls, according to the report.

Private fund issuance by type of strategy

Source: Oliver Wyman

 

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