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Foreign fund distributors in China prefer WFOEs to JVs

Wholly-foreign owned enterprises (WFOEs) in China have advantages over joint ventures (JVs) with mainland banks in onshore fund distribution, argue asset managers from Blackrock, Value Partners and ICBC Credit Suisse at the Fund Forum Asia 2017.

In a change of tack in its China strategy, Value Partners exited its holdings in the mainland joint venture Golden Capital Fund Management with a loss, in October 2015. 

Instead, the Hong Kong-based fund house has set up an asset management wholly-foreign owned enterprise (WFOE) in Shanghai, paving the way to launching onshore-focus funds to institutional and high-net-worth clients.

It has also pursued a Qualified Domestic Limited Partnership (QDLP) quota of $100m in 2015, which allows the firm to sell overseas products to non-retail investors in China.

Albert Teoh, managing director of China business at Value Partners, said that WFOE was a sensible choice if a firm wanted to enter the China market now.

“For a new or small JV, unless you have a rich [partner], with good distribution arms, it’s very difficult to grow,” he said during a panel discussion. 

In contrast, products offered by foreign fund management firms through WFOEs have an advantage as they stand out among the domestic offering, he added. 

A WFOE also has much lower setup costs than a JV, he added.

“We hope to leverage the Stock Connect to capture the flow from institutional and high-net-worth clients, and open the doors for more distribution channels,” he said. The firm also focuses on the ETF and index fund space, he added.

“JV is an awkward marriage,” said Richard Tang, CEO of ICBC Credit Suisse Asset Management (International), the overseas arm of the mainland JV. Their success rate is not that high due to cultural differences, he added. 

“Chinese institutional investors are looking for variety right now,” he said. 

“If [the majority] of Chinese mutual fund companies are providing very retail-oriented, momentum play [type of products], it creates opportunities for US or international firms,” he said.

“For foreign players, a big differentiator is the focus on risk management,” said Graham Turl, Asia Pacific general counsel at BlackRock. “So we seek to differentiate ourselves by being a risk manager in mainland China.”

However, “a lot of international companies underestimate the time required interacting with regulatory bodies to run an asset manager in China,” he noted.

“One should not underestimate the time it takes to build the brand, and the understanding of what is going on in the mainland.” 

Part of the Mark Allen Group.