10
Citi Transaction Services | Citi OpenInvestor
demand for offshore allocations.
Since then, only a handful of frms
have seen success from their QDII
offerings. Some of this, again, has
to do with product design: The bulk
of these funds invest in Hong Kong
markets, which have been highly
correlated with A-share markets over
the past several years, diminishing
the actual amount of diversifcation
that any individual investor could
realize. Some frms, such as Guotai
Fund Management, have offered more
genuine diversifcation (in their case,
a NASDAQ index fund) but even these
have failed to see strong infows,
despite above-average performance.
Future Growth
Longer-term growth in the asset
management industry is therefore
contingent upon frms implementing
a host of changes to their business
strategies. What choices are made
depend upon a frm’s current position
and areas of focus. For smaller
frms, holding back on new product
distribution — deliberately focusing on
existing funds and accepting that no
new money may come through fund
launches — is one possible choice.
Small frms can also refocus their
efforts and specialize in a particular
business line or product segment.
Essence Fund Management, for
instance, had its frst product in the
form of a segregated account. This
allowed the newcomer to sidestep
traditional distribution entirely,
potentially drawing money from
existing institutional contacts.
Regardless, a change in the decade-
old model will be critical for many
frms to achieve healthy levels of
revenue.
If these changes are implemented
— and early evidence suggests that
pioneers are already making the
necessary shifts — we will likely
see rapid growth in industry AUM,
particularly as traditional investments
for retail buyers becomes less
attractive by comparison.
By 2015,
the fund management industry
could see upward of RMB6.8tr
(USD1.1tr) in total AUM, a fgure
that could very well double by 2020
.
This is, of course, to say nothing of
nonpublic segments. Even present-
day market estimates are diffcult
to come by, making forecasts all the
more unreliable. Regardless, China’s
regulatory landscape will continue
to evolve, and segments that are
now underregulated (such as private
funds) will be brought into the open,
potentially making it much easier for
them to raise and manage funds. As
it stands, these entities must rely on
a relationship with trust companies
Exhibit 5: QDII Fundraising Results 2007 – 2012 (RMB m)
Fundraising peaked at the beginning of the program, and since then demand for
offshore allocation available in QDII products has been almost nonexistent
Sources: Z-Ben Advisors, Wind
0
5000
10,000
15,000
20,000
25,000
30,000
35,000
Sep 07 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Mar 10 Aug 10 Jan 11
Jun 11 Nov 11
More generally,
passive products
have continued to grow in
popularity, although they have
not yet proven capable of drawing
signifcant infows away from other
major segments.
Some analysts have
previously suggested that passive
funds provide an attractive structure
in terms of liquidity and cost, features
that have proven attractive elsewhere
(such as the bank wealth management
products described earlier). The
major limiting factor for additional
growth in passive products has been
capital market performance. Between
the strong fundraising seen from
the two debut cross-border ETFs,
combined with past demand trends, it
appears that there is still considerable
potential for gaining assets via new
products, and the lack of growth has
had more to do with insuffciently
varied fund offerings, rather than
a lack of interest among potential
buyers.
Offshore Allocation
Much has been made over the lack
of options for genuine diversifcation
that are currently available for
Chinese investors. To some extent
this is true, but it is important to
remember that product development,
at least when considering what asset
managers can actually create, has
expanded considerably over the last
several years. With that in mind, there
still remains considerable interest in
venturing offshore, if only to access
returns that are not highly correlated
with Mainland markets.
The Qualifed Domestic Institutional
Investor (QDII) program was created
to address such demand by allowing
institutional investors and asset
managers to invest foreign currency
in international markets. One obvious
method of utilizing this quota was to
construct mutual funds around the
framework, to allow retail investors
access to offshore markets.
The theory was more attractive than
the eventual execution, however, as
most fund managers have struggled
to have their QDII funds break even.
After the frst wave of products in
2007 saw extremely strong infows,
the global fnancial crisis diminished