21
China: The World’s Best Opportunity for Asset Managers?
| Distribution Dynamics
Churn, Churn, Churn
As a result of new product bias among
both investors and the major sales
channel, many of the redemptions of
existing products are just recycled
into the purchase of new funds. This
might not be a serious problem if the
overall industry was able to attract
new investors, but up until now, it
appears that most of the RMB2.3tr
(USD363bn) in public funds is from
the same group of investors. The
benefciaries, of course, are once
again the banks. As the prime
distributor, they are in a position to
earn trail fees each time redemptions
move capital out of an existing
product and into an entirely new
offering. Investors suffer the loss of
redemption fees that eat away at the
returns they are able to realize in the
relatively short period of time that a
fund product is actually held.
CSRC is well aware of this problem
and eager to address it, especially
as all of the major distributing banks
are not under the regulator’s direct
control. At present, however, its tools
are limited. For its part, CSRC appears
keen to allow its charges, asset
managers and securities frms more
fexibility in choosing their distribution
options. Such a move is predicated
on having additional options available
and CSRC is well aware of this
fact — while it will likely allow third
parties to directly distribute funds, a
certain amount of control will still be
necessary to assure that providers of
such services implement appropriate
risk-control measures.
Some mutual fund managers have
themselves chosen to alter their
business strategies to overcome the
distribution bottleneck. Over the past
two years, one of the most effective
ways that fund managers have been
able to escape the trap has been to
pioneer new products and preempt
the competition. While ex-ante it is
very diffcult to determine what types
of offerings will prove popular, there
has been such limited diversity that
almost any deviation from the norm
has been handsomely rewarded.
Lion FMC launched a wildly popular
gold fund, utilizing QDII quota to
purchase offshore gold funds. The
fund saw extremely strong infows
— a testament to being able to hit
the sweet spot in demand.
While we
realize it is not realistic to expect
all asset managers to innovate
consistently, the industry would
beneft from any move away from
the follow-the-leader behavior that
seems to plague most managers.
Case Study: Haitong Securities
Haitong Securities is a prime example
of how fnancial institutions within
China have expanded rapidly into
most available segments. Haitong has
interests in a fund manager, a direct
investment subsidiary, an offshore
presence and a strong brokerage
business. Many frms view having
such a wide footprint as a means of
overcoming some of the fundamental
challenges within the industry, such as
the bottleneck in reliable distributors.
Independent Advisers
To fx the distribution handicap on
industry growth, there is interest in
developing a more mature system
within which fnancial advisors can
operate. In China, there is essentially
no equivalent for independent
advisers to retail investors, and even
high net worth investors fnd the most
thorough servicing through — you
guessed it — the banks.
This dearth of small-scale
independent operations has as much
to do with the perception of banks
as the sole trustworthy outlet, as
it does with regulatory barriers
preventing third-party sales (or rather,
the diffculty involved in obtaining
a distribution license). There have
been some exceptions — the most
well known internationally being
Noah Holdings, an overseas listed
fnancial advisory frm. Even Noah
Holdings, however, does not directly
distribute funds, but rather serves
as a sales agent and takes fees per
client directed to asset management
products. While the long-term
sustainability of the practice may
seem questionable, there is no
doubt that Noah is occupying a
necessary space in China’s investment
management industry. It has also
been one of the most aggressive frms
in pursuing licenses for direct third-
party distribution.
Case Study: Noah
Noah has been one of the most
aggressive fnancial advisors within
China, and has built its business upon
targeting high net worth investors
to buy into fund products, primarily
those from trusts, private funds
and private equity. It has also been
relatively aggressive in its expansion,
having opened a Hong Kong offce
early in 2012.
Foreign frms interested in capitalizing
on this wide-open market space have
only a handful of avenues for access.
Aside from the joint venture platforms
described earlier, a wholly owned
advisory frm may soon be the best
route to access investors.
Such an
operation alone may have diffculty
generating business. However,
when paired with another holding,
be it a JV or an offshore manager,
the possibility of realizing robust
infows will increase.