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Principal-CCB tie up remains as other JVs breakup

Rex Auyeung, who will retire as Principal Financial Group’s Asia chairman in June, believes a corporate culture match is key to his firm's long joint venture with mainland powerhouse bank CCB.
Fund Selector Asia

Auyeung has been with the Iowa-based group for 23 years, responsible for developing partnerships in China, India and Malaysia with local players. He sees a joint venture as a short cut to compete with the biggest players in these markets.

“If you build the company on your own, it’s very hard to catch up. But if you do [the joint-venture] right, you can speed dial,” he told FSA.

CCB Principal, the firm’s mainland joint-venture, was first set up in September 2005. China Construction Bank, the world’s second largest bank by assets, holds a majority of 65% stake, followed by Principal’s 25% and 10% from state-owned China Huadian Corporation. The JV is ranked the 11th largest mutual fund manager in China with RMB 283.7bn of assets under management as of September-end, AMAC data showed.

CCB is all about sales channels and brand name, Auyeung said. It has about 12,700 branches and sub-branches in the country.

“Principal’s role is more on the back office side, for example the risk management part. We also contribute to the design and management of the product. 

“[The JV is] about understanding the market’s buying behaviour.” Auyeung said. For example, “investors in Shanghai tend to be more speculative, while for the inland cities they hold a more long-term view. Not all the Chinese behave in the same way.”

Going in alone

Recently, China regulators relaxed rules to permit foreign fund managers to set up wholly-foreign owned enterprise (WFOE) to launch China-focus products to onshore institutional and high net worth investors. Fidelity is taking this approach and is expected to be the first such firm to sell products under the WFOE structure in China.

Auyeung acknowledge that a 100% foreign-owned entity in mainland China has attractions. “But there’s one question: Who will sell the products? In particular in Asia, banks still dominate roughly 60% of the overall fund sales,” Auyeung said.

In addition, brand development without a local partner in China can be costly and difficult.

As of 2016-end, there were already 108 mutual fund houses in China, in which 44 are joint-ventures between domestic and foreign firms, according to Asset Management Association of China (AMAC).

Although CCB Principal has had their venture for 17 years, some JVs are mulling a breakup. Recent examples include Societe Generale considering the sale of its 49% stake in Fortune SG Fund Management.

Allianz’s JV in China, GTJA Allianz, is set to face changes after Guotai Junan Securities said it is selling a 51% majority stake.

Auyeung said CCB management told him that the bank picked Principal as a partner in the first place because of the similar corporate culture: Principal’s insurance background shows that it is conservative but stable, with a long-term horizon.

“If one side is looking at short-term interests, the partnership will eventually unwind because it’s a mismatch.” 

Auyeung said he sits at the board of CCB Principal and staff from Principal work at the JV. “[Both firms] are active in daily management and consider the best interests for the JV instead of themselves.”

He said CCB never acts without discussing decisions with Principal, which grants permission to take action. “Once, the JV was planning to launch some products which I thought were too risky. CCB put the plans on hold. They handed me the explanatory reports, which I later approved. They do not act on their own just because CCB is the majority shareholder.”

After Auyeung steps down from Principal, his role will be shared by Thomas Cheong, vice president of North Asia, and Pedro Borda, vice president of South Asia and India, who will report directly to Luis Valdes, president of Principal International, the firm noted in a statement.

Part of the Mark Allen Group.