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Alibaba Sparks a Revolution in Asset Management in China

E-commerce giant’s online money market fund rockets Tianhong Asset Management to prominence and sparks a wave of imitators.

  • By Eric Johnson

From Locked ranking

Anyone trying to make sense of China’s rapidly changing asset management business would do well to remember that every teenager with surging hormones eventually grows up.

The industry turned 16 this year, and the Internet has acted like a shot of testosterone, driving an unprecedented growth spurt that could change the business out of all recognition.

Consider Tianhong Asset Management Co. In March 2013 the Tianjin-based firm was laboring in obscurity on the margins of the industry, managing a paltry $1.9 billion in assets. But in June of that year, it teamed up with Alibaba Group Holding to launch a money market fund that investors can access with just a click on the e-commerce giant’s website. The fund, named Yu’e Bao, lured more than 500 billion yuan ($81 billion) from tens of millions of investors in just nine months.

That stunning growth vaults Tianhong to the top of the China 20, Institutional Investor’s exclusive annual ranking of the country’s largest fund managers. The company managed a cool $89.5 billion in assets at the end of March. That’s nearly 10 percent of the entire $904 billion industry, and almost 17 percent of the assets managed by all the firms in the China 20, a number that grew by 38.5 percent last year, to more than $535 billion.

Tianhong knocks longtime industry leader China Asset Management Co., known as ChinaAMC, into second place in the ranking and pushes traditional leaders Harvest Fund Management Co. and E Fund Management Co. each down a notch to third and fourth, respectively. ICBC Credit Suisse Asset Management — a joint venture between China’s largest bank, Industrial & Commercial Bank of China, and Switzerland’s Credit Suisse — rises one notch, to fifth place. Bosera Asset Management Co. slips two places, to sixth; it suffered a 12.8 percent decline in assets.

Online finance is driving strong growth at several of these firms, although none have matched the meteoric rise of Tianhong.

ChinaAMC actually beat Tianhong to the punch by launching its first online product in January 2013. It recently started selling mutual funds through the WeChat social network, run by Alibaba’s chief rival, Tencent Holdings. Such innovations helped ChinaAMC increase assets by 38.1 percent, to $76.6 billion.

“Our company has been investing a lot in e-business,” says Li Yimei, ChinaAMC’s Beijing-based chief marketing officer. “But over the past year, there was a burst of energy.”

ICBC Credit Suisse offers clients a variety of fund products through smartphone apps. The firm saw its assets surge by 70 percent in the latest year, to $37.3 billion.

By selling funds through platforms such as Alibaba and WeChat, fund managers have been tapping savings formerly locked up in term deposits at Chinese banks. Tianhong’s Yu’e Bao, for instance, offers yields of more than 5 percent, well above the 3.3 percent maximum that banks can give on term deposits, while giving investors the ability to withdraw money at any time — all at the click of a mouse. Besides consumers, small companies selling products through Alibaba e-commerce websites such as Taobao have turned to Yu’e Bao as an easy way to earn interest on cash at hand. The fund’s success is just one reason why Alibaba was able to raise $25 billion with its record initial public offering in New York last month.

To compete against the Tianhong-Alibaba juggernaut, most big fund managers have introduced personalized online-accessible funds with innovative features. A fund recently launched by ChinaAMC along with China Citic Bank, for example, lets clients earn 4 percent interest on money that’s also available for shopping with a bank card.

China Universal Asset Management Co. offers subscriptions to its Cash Pot money market fund, which was paying interest of 4.56 percent last month, through WeChat. The firm, whose assets grew 44 percent in the latest year, remains in ninth place on the China 20. “We’ve seen a lot of inflow” since Cash Pot came out, says Yang Xuerui, the company’s Hong Kong–based managing director of international business.

Yu’e Bao’s growth rate has been slowing in recent months, notes analyst Sun Jiang of Shanghai-based consultancy Z-Ben Advisors. Nevertheless, she believes the online mutual fund segment — which didn’t exist two years ago — could top $244 billion by the end of 2014.

The surge in demand for mutual funds through online platforms has been the industry’s most dramatic change but far from the only one. Other developments — the introduction of balanced funds, rising demand for equity- and bond-linked funds by institutional investors, and government liberalization policies aimed at encouraging equities investment — are also fostering growth in the market.

For some funds the percentage of capital flowing in from institutional investors is rising while the portion from the retail side shrinks. This trend became evident last year at China Universal, according to Yang, and she thinks it could accelerate through 2015.

“We see institutional investors making a greater contribution to AUM,” she says. China Universal’s managed assets were 30 percent institutional and 70 percent retail last year, she explains, but that ratio is likely to hit 50-50 by the end of this year.

Encouraging the shift to institutions is the government’s ongoing liberalization of China’s financial markets. The gate has been gradually opening since mutual funds were introduced in 1998, giving birth to the industry. As of July the Asset Management Association of China counted 95 domestic mutual fund managers, with $904 billion in assets, compared with 82 managing $602 billion last year.

The next major liberalization step will likely be the Shanghai–Hong Kong Stock Connect pilot project. If launched in October, as expected, foreign investors will be able to trade more than 500 Shanghai A-share stocks, and Chinese investors will have access to more than 200 Hong Kong stocks. The Shenzhen stock exchange could be added to the program later. Currently, foreigners can access the mainland market only through institutions that have quotas under the Qualified Foreign Institutional Investor program.

Most fund managers have been gearing up for this connectivity. China Universal recently launched an index fund with two risk options that tracks the Hong Kong exchange’s Hang Seng Index. It’s also among the firms offering equity funds tied to Shanghai stocks. Yang says her firm earned about $326 million for clients through A-share investments in the first half of 2014, a figure that represents “more than 20 percent of the total profit of our mutual funds.”

Firms have also introduced a flurry of balanced funds that combine equities with fixed income and cash. Twenty-one balanced funds have been launched since June by firms such as China Southern Fund Management Co., which falls two places to No. 7 despite a 20 percent increase in assets, and GF Fund Management Co., which drops two places, to 10th, with a 7 percent increase in assets.

A proposed mutual recognition scheme, which regulators in Beijing are considering, also holds good potential. According to a recent Z-Ben report, the proposal is “an entirely new concept” that would allow “cross-selling of existing funds, in both directions,” meaning foreign investors would be able to buy into China funds and Chinese investors would be allowed to buy overseas funds.

“Although not yet officially launched, the longer-term implications appear significant, particularly for foreign managers,” the report said. “This will essentially be the first real opportunity to tap into new assets from a vast pool of Chinese investors.”

That said, ChinaAMC’s Li insists that retail-targeted online funds will remain the star of the show. As more investors recognize the advantages of liquid mutual funds paying higher rates of interest, bank savings deposits are expected to shrink. “We feel everyone should invest in money market funds,” Li says, adding that ChinaAMC has already signed agreements with most major banks for fund products.

China Universal’s Yang says the past year’s dynamic developments prove the industry is indeed “more sophisticated than before” and marching toward maturity. What’s needed now is a little more parentlike patience. “You have to give the market time,” she says. • •

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