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WFOEs face more hurdles besides distribution

With more global fund houses setting up wholly foreign owned enterprises (WFOEs) in China, finding enough of the right staff is likely to be difficult and expensive.
Jackson Lee, Fidelity International

Foreign asset managers that have set up a WFOE in China have cited distribution as one of the key challenges. But as in any other market, distribution will not be the only issue, and “China is just one of them”, according to Jackson Lee, country head for China at Fidelity International

He explained that global fund houses should also pay close attention to hiring the right staff.

“Having the right people that can fit into your company and understand who you are, and who are able to talk to people in Hong Kong and other parts of the world, is key [to a successful WFOE],” he said during a panel discussion at the annual Hong Kong Investment Funds Association conference last month.

Fidelity now has 30 staff in its Shanghai-based WFOE, with the majority being investment professionals, Lee said. He noted that the firm started hiring in 2011. It is also the first WFOE that was able to obtain a private fund management (PFM) licence from the Asset Management Association of China (AMAC), which enables foreign firms to distribute onshore funds to domestic qualified investors.

“We started recruiting back then, and that helps because now we have a very healthy pipeline of young analysts who have been with us for between seven and eight years. They are at some point ready to become portfolio managers.”

But with the growing number of WFOEs set up in China, Lee said he expects that finding the right people will be a key challenge in the next five years.

There are now at least 40 foreign managers that have already established a WFOE in China, with State Street Global Advisors being the latest to be granted a licence last month.

“You have global firms going into China, recruiting general managers and key staff for compliance, investment, risk management and distribution.”

Last year alone, a number of firms ramped up their WFOE-related investment and distribution capabilities, including UBS Asset Management, Eastspring Investments, Barings and Schroders.

Recruiting candidates externally is not the only option foreign managers have. Aberdeen Standard Investments, for example, transferred staff internally alongside hiring from other firms.

Expensive staff

Eleanor Wan, Hong Kong-based CEO at BEA Union Investment, added during the panel discussion that setting up a WFOE is costly.

“Now, running a WFOE is a not a cheap investment. Staff is very expensive,” she said.

In US dollar terms, salaries of investment professionals in Hong Kong are generally higher than those in China, according to Hays’ 2018 salary survey. However, when compared with Singapore, salaries in China are slightly lower or on par with most roles.

Basic annual salaries (‘000) in local currency

Source: Hays

Besides the costs related to staffing, Wan advised foreign managers to be cautious when reviewing their annual budgets for their WFOEs.

“Be a little bit cautious when you’re doing your budget because the timing is not within your control.”

For BEA Union, for instance, Wan said the firm had to renew its budget every year.

“The original plan was to have the WFOE licence within six months, and another three months for the AMAC application [for the PFM licence]. Now, one year has [passed] and we’re still in the AMAC application.”

BEA Union received its WFOE in October 2017 and is now in the “late-stages” of setting up its onshore office, Wan said in a previous FSA interview.

The firm’s Shenzhen-based WFOE has at least 10 people, including two investment professionals specialising in China equities and the other in fixed income.

 

 

Part of the Bonhill Group.