19
China: The World’s Best Opportunity for Asset Managers?
| Distribution Dynamics
Total
Revenue
(RMB m)
Total Cost
(RMB m) No. Funds
Average
Revenue
per Product
(RMB m)
Average
Cost per
Product
(RMB m)
2006 7,585
6,480
288
26.34
22.50
2007 36,944
22,656
365
101.22
62.07
2008 36,004
23,094
438
82.20
52.73
2009 33,995
22,831
556
61.14
41.06
2010 35,690
24,570
703
50.77
34.95
2011 33,110
24,750
914
36.23
27.08
Exhibit 13: Costs and Revenues for Fund Managers
Rising costs and declining proft, on average, have bitten into fund managers’
bottom lines
Sources: Z-Ben Advisors, Wind
These dynamics mean that
distributing through banks is
becoming an extremely expensive
prospect. Trail fees (at, if not above,
50% of management fees) and
custodian fees (a hefty 25bps per
annum) rank as the highest-cost
elements of fund managers’ business.
Several years ago, fund managers
even paid undisclosed incentive fees
to bank staff, in order to get to the
top of the distribution list. Since these
sums were not made public, and
were indeed of questionable legality
in the frst place, it is diffcult to
assess whether they were effective.
Regardless, since regulators banned
the practice outright, many fund
managers have gradually seen their
average fundraising results fall — and
explicit trail payments increase —
suggesting that lack of commitment
by bank staff themselves may be a
signifcant bottleneck. In the past,
incentive payments may well have
been an effective means to assure
additional infows. Whether or not
this can be replicated in the future
remains unknown — if so, banks are
unlikely to be a major part of the
equation.
In principle, spending
money on their own dedicated sales
staff, with appropriate marketing
efforts, appears to be one of the
best routes forward for most
asset managers.
With costs on the rise, numerous
observers have wondered how
exactly asset managers can move
forward. Only recently have potential
alternatives to the bank framework
begun to emerge, and even these
have been slow to develop. That
said, the big four domestic banks still
account for the bulk of most types of
transactions for asset management.
We’ll be frank: Within the next several
years it is unlikely that a reliable
alternative sales channel will emerge,
and for the foreseeable future,
commercial banks will remain the
dominant way to access end investors.
This level of importance is not lost
on CBRC, the chief banking regulator,
which realizes that its charges are
now sitting on top of one of the most
proftable gold mines in China’s
fnancial services sector.
Fund managers that have a bank
shareholder appear to be free, or at
least insulated, from some of these
pressures. All of the major banks
in China have joint venture FMC
partnerships with several foreign
partners, and these companies have
seen some of the best asset retention
in the industry.
While formally there
is no direct relationship between the
bank as a distributing agent and the
joint venture FMC, available data
suggests that bank shareholders
often take that extra step to help
push their subsidiaries’ products
when new launches are conducted.
Outperformance in fundraising among
these frms also shows just how
dependent fund managers are on
having a reliable sales channel.
Online sales have been touted as
one possible solution. For general
consumer goods, China is actually
fairly developed in the percentage
of transactions that occur online,
even when compared to developed
markets. Unfortunately, such
behavior has not yet translated to
the fnancial service sector, where
online channels remain the exception
rather than the rule. Part of this
may be just a problem of execution:
If only a handful of fund managers
have websites that could be described
as functional, fewer still could be
categorized as “intuitive” or “user-
friendly.” Nevertheless, the rewards
for breaking into this market are
potentially very high, and independent
third-party platforms have begun to
look into distributing fund products
online. Regulatory barriers have so far
made such a prospect diffcult — CSRC
must approve any fund distributor,
and so far no single entity has been
able to obtain all of the licenses
necessary to create a functional
funds supermarket. There is no lack of
candidates trying to do so, however —
a topic we will examine later in more
detail.
Finally, fund managers themselves
have attempted to enhance their
distribution capabilities. So far, this
has revolved around opening wealth
management centers and bringing
in a dedicated sales staff. While
there is no way most FMCs will be
able to go toe-to-toe with banks on
their own terms, this can provide a
supplementary means of drawing in
new AUM. Targeting high net worth
investors by locating in China’s most
populated cities has proven a popular
technique. Whether or not this is any
less expensive than simply utilizing
banks, however, remains to be seen.
Of course, there are more banks in
China than just ICBC and CCB, and
many fund managers have begun
to engage so called nontraditional
channels. China Merchants Bank has
proven to be a reliable choice for
frms interested in the high net worth
segment, while a handful of regional
banks provide support for mid-sized
and small fund managers.
At present,
however, there is no substitute for