Foreign asset managers are struggling in China to gain much traction because of the “herd mentality” among retail investors, which means that they tend to purchase funds based on firms’ brand names rather than more salient criteria.
That was the view of market observers FSA spoke with even as the authorities have been accelerating approvals for foreign asset managers to establish wholly owned mutual fund businesses in China.
After BlackRock became the first foreign firm to obtain approval from the China Securities Regulatory Commission (CSRC) in 2021 to set up a wholly owned mutual fund business, the CSRC had paused its approvals until the second of last year when more firms began getting the green light again.
In November, Neuberger Berman received the go-ahead to set up a wholly owned mutual fund business and a month later Fidelity International got the same approval.
Meanwhile, Manulife Investment Management, JP Morgan Asset Management and Morgan Stanley Investment Management all received approval to buy out their local partners.
Schroders is the latest to receive approval from the CSRC to establish a wholly foreign-owned public fund management (FMC) company from scratch.
Despite the sudden surge in approvals, most market observers felt that foreign firms would need to proceed with caution in China as they would struggle to unseat some of their domestic competitors that have built up a solid track record and brand awareness among China’s mostly retail investor base.
Underscoring the difficulties faced by foreign asset managers in China is VanEck’s purported decision to drop plans to set up a mutual fund unit, according to a report from Reuters. This came after Vanguard Group dropped similar plans in 2021, citing a “crowded” market. VanEck did not respond to requests for comment from FSA.
“The majority of Chinese retail investors still chase the latest popular themes and trends. They often display a herd mentality and purchase funds increasingly based on firms’ brand names and portfolio managers’ track records,” said fintech company Broadridge in written responses to FSA’s questions.
Broadridge also noted that with the help of heavy marketing centred on “star managers”, local fund firms were able to roll out blockbuster new funds that had attracted at least Rmb10bn ($1.46bn) each within a few days.
According to a survey from Broadridge, brand was the third most important criterion that Chinese fund selectors base their asset allocation decisions on.
Top 10 selection criteria by Chinese Fund Selectors
|1||Quality of fund management team||Brand||Quality of fund management team|
|2||Risk management||Quality of fund management team||Solidity of company|
|4||Investment strategy/ philosophy||Product range||Investment strategy/ philosophy|
|5||Solidity of company||Investment strategy/ philosophy||Support/service/relationship|
|6||Support/service/relationship||Solidity of company||Pricing|
|7||Product range||Support/service/relationship||Risk management|
|8||Fund size and liquidity||Information provision/ reporting & transparency||Product range|
|9||Information provision/ reporting & transparency||Pricing||Information provision/ reporting & transparency|
|10||Client demand||Fund size and liquidity||Client demand|
Chloe Qu, senior manager research analyst at Morningstar China, also agreed that foreign asset managers would need to build a better track record before they can increase product visibility among local investors.
“Fund performance as well as named portfolio manager’s reputation and track record are the most important factors that Chinese fund investors would consider when selecting funds,” said Qu.
“Foreign asset managers have just entered the market and most of them haven’t launched products yet.”
First mover advantage?
According to Chinese data provider Wind, China’s asset management industry grew at its slowest pace since 2013, increasing by only 5.34% to Rmb28.81trn.
Several market observers pointed out that the asset management industry in China is already crowded, leaving few opportunities for foreign firms to make their mark.
According to Morningstar, money market fund is the largest fund category in China’s mutual fund market by assets under management and it is widely held by Chinese investors as cash equivalents in their portfolio.
It is followed by equity-heavy funds, which is those with more than 70% of their portfolio invested in equities, although ‘fixed income plus’ strategies are also gaining traction in recent years.
“These are typically ‘core’ products on local asset managers’ product shelves,” said Qu.
“Thus far, we haven’t seen foreign asset managers introducing differentiated fund products and most of them are still building their product lines in these ‘core’ categories.”
Out of the foreign asset managers, BlackRock, having been given the greenlight from the CSRC to set up a mutual fund business in China in 2021, is the most advanced in terms of its offering.
BlackRock has launched four products onshore so far, including three equity and one fixed income mutual fund product.
Although, in January, the BlackRock China New Horizon Mixed Securities Investment Fund published its report for the fourth quarter of 2022, which saw its net asset value fall by Rmb324m to Rmb4.41bn when compared with the third quarter.
Meanwhile, although Blackrock’s second onshore public fund, the HK Stock Connect Long Horizon Mixed Securities Investment Fund, did not see a significant redemption in its fund, some onshore media noted that the fund only raised RMB573m upon its launch, compared with RMB6.68bn for the first fund.
Despite the difficult start, several market observers also pointed out that global FMCs have some advantages including their parents’ strong investment and asset allocation expertise, investment research capabilities with global views and advanced risk management and operational systems.
“While it is too early to tell whether global asset managers will be successful in their growth plans in China, the new entrants are likely to bring global best practices to the asset-management industry in China by encouraging a greater focus on adopting a consistent and repeatable investment process and a robust risk-management framework; this can then benefit investors through a greater choice of higher-quality fund products,” said Rachel Wang, Morningstar’s director for manager research in China in a recent blogpost on the topic.