9
China: The World’s Best Opportunity for Asset Managers?
| Asset Management Overview
management products. Even more
aggressive product diversifcation will
be necessary to meet this changing
landscape, if fund management
companies are to see stronger growth.
Problems in Paradise
The lack of suffciently diversifed
products has limited frms’ ability
to access the lower end of the risk
spectrum. Five years ago fund
managers would have probably
said that this was the result of
restrictions on what they could
actually do with raised funds, but
since then, regulators have been
relatively responsive and allowed
fund managers to target non-
traditional segments for investment.
CSRC also allowed fund managers
to offer segregated accounts,
designed to appeal to high net worth
or institutional buyers.
Even with
that platform, however, FMCs have
struggled to compete effectively
against the gains made by private
funds.
Although there have been advances
in product development over the last
several years, variety is still lacking
when compared with more developed
markets. In general, there is also a
distinct follow-the-leader approach
where frms often mimic any instances
of success. This has led to a series
of product cycles, which means that
at any given time, investors have a
restricted selection of new product
types available, limiting the appeal
of the industry as a whole.
Case Study: Full Goal
Full Goal is a relatively large fund
manager in China, and has been
a good example of how a frm can
utilize a consistent strategy while
simultaneously adapting to market
trends in order to draw new infows.
Traditionally, Full Goal was an equity-
centric house, and began to slowly
shift to increased fxed income
offerings when equity markets began
to sour. It did this not on a per-product
basis, as it deliberately ignored
several short-term trends but rather
developed a well-rounded portfolio.
Most recently, it has switched to
offering absolute-return products.
Exhibit 4: Infows from New Public Mutual Funds by Type
(RMB bn)
Product demand tends to go in cycles, with early movers taking a large amount of
AUM in their products
Sources: Z-Ben Advisors, Wind
0
20
40
60
80
100
120
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12
Equity-Active
Equity-Passive QDII
Fixed income
Personnel turnover has also been a
major problem for fund managers.
Fundamentally the result of a limited
supply of experienced professionals,
the industry has also suffered from
an inability to properly incentivize
key personnel. Fund managers are
unable to list on a stock exchange,
and additional rules make it diffcult
to provide direct equity stakes even
to senior management. As a result
of limited retention strategies,
compensation for the top performers
(both managers and analysts) has
gradually increased. Less-than-
robust corporate governance and
frm management only compound
this problem. Private funds therefore
represent a natural exit for the best
and brightest, and when well-known
portfolio managers leave,
they often
take a sizable proportion of a frm’s
AUM with them.
Turnover and salary infation have
also led to signifcant pressure on
proftability at most frms. At most
frms, only a small coterie of portfolio
managers has extensive tenure.
With salaries on the rise, immediate
incentives favor moving between
frms after a solid run of performance.
This, of course, has a large number
of ancillary effects: After solid
performance, frms are at risk of
losing their best people, which has
an unsurprisingly negative effect on
asset retention. Replicate this cycle
enough times, and it is not a shock
that the industry has struggled to
retain buyers who are otherwise on
the margin.
ETFs and Passive Products
The frst exchange-trade fund (ETF)
in China was launched in 2004, but
it was not until recently that the
infrastructure and trading system
developed to allow suffciently
mature cross-market offerings
between the Shanghai and Shenzhen
exchanges. Two products have been
launched under the new setup, from
Harvest and Huatai-PineBridge,
and collectively raised RMB50bn
(USD8bn). Such a large fundraising
take was primarily the result of
having utilized a national network of
brokerages, sidestepping the bank
bottleneck that affects non-ETF funds.
Their timing (at the beginning of 2012)
also appears to have been ideal, as
institutional investors felt that equity
markets had fnally hit a bottom,
and were moving back into equities
throughout the period.