A majority of wholly foreign-owned enterprises that have PFM licences in China have not been able to raise assets above RMB 1bn ($140m).
Out of the 20-odd foreign PFM players, 11 firms have assets in the RMB 100m-1bn range, while nine have assets below RMB 100m, according to a Cerulli Associates report.
Having a PFM licence enables foreign entities to develop and sell funds investing in onshore assets to domestic qualified investors, such as institutional and high net worth investors.
Launching multiple products does not translate into sizable asset gathering, the report shows. For example, UBS Asset Management, which launched nine products from 2017-2019, managed to raise only RMB 100-RMB 1bn as of the end of December. Separately, a Z-Ben report noted that six of its products have assets less than RMB 5m.
That has not stopped the firm from introducing more products. This year, UBS AM rolled out six onshore funds and now manages a total of 15 onshore products, making it the leading foreign manager in terms of number of funds.
Another manager that has launched several products is Value Partners, which rolled out eight onshore funds from 2017-2019. But its total assets have not exceeded RMB 1bn, according to the report.
Meanwhile, of the nine firms that have assets below RMB 100m, seven of them have only launched one onshore product so far. They include Invesco, Eastspring Investments, Mirae Asset Global Investments, Alliance Bernstein, Allianz Global Investors and Barings.
One of the main challenges to raising investment capital is distribution, according to Ye Kangting, Singapore-based research analyst at Cerulli.
“Some channels require managers to have a track record of at least three-to-five years, while others might not find it worthwhile to onboard private funds considering the limited commission revenue,” she told FSA.
Ye explained that commission revenue may be limited as the number of investors in private funds are capped at 200 per product.
“[In addition], while products managed by local star managers can easily raise a huge amount of assets, products launched by managers that are not widely recognised among onshore investors require much more effort from distributors,” she added.
However, foreign players may be able to attract more assets if they are able to differentiate products from those run by domestic firms.
For example, Ye believes that Hong Kong-based Value Partners may have an edge after the China Securities Regulatory Commission in 2019 allowed both domestic and foreign PFMs to invest in H-shares through the Hong Kong-China Stock Connect schemes.
“Some local investors value Value Partners’ expertise in Hong Kong investments,” she said.
Not all differentiated products are able to gain traction, however. For example, UBS AM last year became the first foreign manager to launch an onshore fund-of-hedge funds in China, which invests in other onshore private funds.
“Demand for such products remains low,” Ye said.
However, one foreign manager stands out. UK-based quant firm Winton Capital, which has launched seven products, now manages at least RMB 2bn in assets from investors, according to the report.
Cerulli believes that Winton Capital was able to differentiate itself in the market with its quantitative capabilities.
“Foreign managers that are able to demonstrate meaningful track records in commodity trading advisor (CTA) strategies have the advantage, as local investors generally perceive foreign managers as having more experience dealing with futures and developing quantitative strategies, compared with their domestic counterparts,” Ye said.
Ye explained that there is a lack of investment professionals specialising in quantitative strategies in China, despite the increasing number of overseas-trained fund managers.
She added that Winton Capital had already built its reputation among qualified investors because it has been providing advisory services to Hwabao WP Fund Management’s segregated accounts since 2012. Hwabao WP (formerly Fortune SG Fund Management) is 49% owned by Warburg Pincus Asset Management.
Foreign quant competitors have entered the PFM arena in China. But they have not been as aggressive in terms of their fund launches, according to Ye. For example, UK-based Man Group, which received its PFM licence in 2017, has launched only two products.
Other quant firms are relatively new to the market. DE Shaw and Two Sigma, for example, just received their PFM licences last year, with each having one product.
Private or retail?
Previously, the only way that foreign managers were able manufacture and sell onshore products in China was to establish a wholly foreign owned subsidiary and obtaining a PFM or qualified domestic limited partnership (QDLP) licence. But both licences are limited to the private funds market, where only institutions and high net worth investors can participate.
The QDLP programme allows foreign managers to raise money from professional investors in China, within assigned quotas, to invest in offshore assets.
However, on Wednesday, China officially lifted the investment limitation for foreign fund management firms with a mainland joint venture, allowing 100% ownership. The result is that foreign firms are permitted to establish their own mutual fund companies in China, allowing them to access the mainland’s retail market. Blackrock and Neuberger Berman have been the first to file an application with the CSRC.
Both the private and public markets in China are sizable. The public mutual fund industry has assets of RMB 16.36trn while the private market, which includes traditional and alternative funds, has RMB 13.7trn, according to data from the Asset Management Association of China.
However, like the private fund market, foreign players looking at the retail market should also expect difficulties in distribution and extreme competition, industry sources said previously.