When Beijing authorized domestic banks and insurance companies to set up mutual fund companies late last year, the authorities hoped to invigorate the country's capital markets and encourage citizens, who keep most of an estimated $1.6 trillion in savings in low-yield bank accounts, to diversify their investments.
Talk about wish fulfillment. One bank after another has entered the fray, often with a foreign partner, combining the banks' sheer distribution power with foreign fund management expertise. Consider the experience of ICBC Credit Suisse Asset Management Co., a joint venture led by the nation's biggest lender, Industrial & Commercial Bank of China. In August it launched its first fund: The Core Value Equity Fund proceeded to pull in a cool $530 million during a one-month promotion period, showing off the sales muscle of ICBC's gargantuan 21,000-branch network.
"We anticipate a big sucking sound as assets flow into the coffers of bank-led ventures," says Shiv Taneja, Singapore-based Asia-Pacific chief at consultant Cerulli Associates.
The entry of ICBC and other big banks and insurers which previously were allowed to sell only third-party funds has set off a free-for-all in one of the fastest-growing asset management markets in the world. Some 45 fund management companies have sprung up since the government first authorized mutual funds seven years ago, and their total assets nearly doubled in 2004, to reach $39.9 billion, according to the China Securities Regulatory Commission. That robust expansion has continued, with assets growing by 31.2 percent in the first half of this year, to $52.4 billion, according to Shanghai-based fund management consulting firm Z-Ben Advisors.
Such torrid growth, combined with the liberalization of the industry, has triggered a scramble among foreign fund managers to find partners in China. Just as leading overseas institutions have moved in recent months to take stakes in China's big banks, so too are they rapidly striking partnerships with domestic fund management companies.
In March, Germany's Deutsche Asset Management bought a 19.5 percent stake in Harvest Fund Management Co., the No. 2 firm in our ranking, for an undisclosed amount. Beijing-based Harvest, which was founded by China Credit Trust Co., Beijing Securities Co. and Lixin Investment Co., has kept pace with the market's overall growth, reporting assets of $3.7 billion at the end of 2004, up from $1.8 billion a year earlier.
In June, Shanghai-based Bank of Communications, China's fifth-biggest lender, formed a joint venture with Schroders; the Chinese bank owns 70 percent, and the British fund manager the remaining 30 percent. August saw the debut of one of the most high-profile alliances yet CCB¬Principal Asset Management Co. The Beijing-based venture is owned 65 percent by China Construction Bank, the country's third-biggest lender; 10 percent by state-owned power producer China Huadian Corp., and the remaining 25 percent by Principal International, a subsidiary of Des Moines, Iowa-based Principal Financial Group.
The deal making is expected to continue in coming months. France's Crédit Agricole is reportedly discussing a possible joint venture with Agricultural Bank of China, the country's fourth-biggest lender, and Shanghai Pudong Development Bank, China's seventh-biggest, is said to be in discussions with France's Axa Investment Managers.
"There is long-term unlimited potential in the China market," says Christof Kutscher, Hong Kongbased Asia-Pacific head of UBS Global Asset Management, which in January bought a 49 percent stake in Shenzhen-based China Dragon Fund Management Co., a small firm with just $386 million in assets under management. Kutscher says the growth of assets is all the more remarkable because it has been happening at a time when the Chinese market was flat the MSCI China index, measured in U.S. dollars, fell 0.8 percent in 2004. "The market can double, triple or quadruple in a few years," he contends.
In recognition of this sizzling business, Institutional Investor is introducing its first ranking of leading Chinese fund managers. The top 20 firms on our roster had assets under management of $38 billion at the end of last year. Leading the pack in II's new ranking is Shenzhen-based China Southern Fund Management Co., which saw its assets increase to $6.1 billion at the end of 2004 from $3.5 billion a year earlier. The firm manages six open-end funds with combined assets of $5.9 billion at the end of June and four closed-end funds with $710 million in assets. China Southern owes its success to cutting-edge product development, says Peter Alexander, founder and principal of Z-Ben Advisors. "It comes to market with new and unique product offerings ahead of competitors," he says. For example, the firm's $193 million Southern Active Allocation Fund, launched in October 2004, was the first listed open-end fund. For all the innovation, though, fully 70 percent of the firm's assets are in the Southern Money Market Fund, which was launched in March 2004.
China Southern is 100 percent Chinese owned: Huatai Securities has 45 percent, Shenzhen Airport Authority 30 percent, Xiamen International Trust & Investment Co. 15 percent and Industrial Securities 10 percent. Many other leading managers are joint ventures with foreign players, though. Both Chinese and foreign firms are taking advantage of a relatively liberal regulatory regime: The government allows foreign firms to own up to 49 percent of a fund manager, compared with a lower ceiling of 25 percent on foreign stakes in Chinese banks.
For Chinese fund companies foreign partners bring expertise in fund management, product design, sales and marketing and risk control. For foreign managers joint ventures offer access to a market of extraordinary potential.
As fast as the overall mutual fund market grew last year, some firms posted gains that were truly phenomenal. The eighth-ranked firm, Fortis Haitong Investment Management Co., saw its assets soar more than six-fold, to $1.6 billion at the end of 2004 from $251 million a year earlier. That growth largely reflects the launch of the Fortis-Haitong Income Fund, which capitalized on an upswing in sentiment on the Shanghai stock exchange to haul in a record 13.1 billion renminbi ($1.6 billion) in assets in March last year. The fund shed some assets by year-end, reflecting the fact that many new launches see big inflows, and outflows, in their early months.
That's one reason ICBC and Credit Suisse aren't taking anything for granted, despite the hot start of their venture. "Holding on to assets is one of the biggest challenges in China," says Clayton Coplestone, the Hong Kongbased director of Asia sales at Credit Suisse Asset Management, which owns 25 percent of the venture. "It's a very competitive market."
The biggest pool of assets in China is in the National Council for Social Security Fund, which reported 2004 year-end assets of $20.7 billion. It is not included in II's ranking because it is not a fund manager, but some of its assets are included in the totals reported by individual firms that manage Social Security portfolios. In addition, our list does not include newcomers like ICBC Credit Suisse.
Although these ranked firms manage some pension money, the vast bulk of their assets are in mutual funds. Recent regulatory moves promise to open up other avenues for growth. In August the Ministry of Labor and Social Security awarded licenses to 15 fund management companies, allowing them to manage pension assets under the country's enterprise annuity pension arrangement. That's a voluntary, employer-sponsored defined contribution system; it is scheduled to get off the ground next year. Among the new license holders: Harvest, Fortis Haitong and China Merchants Fund Management Co., which ranks seventh on II's list.
The Labor Ministry forecasts that the new enterprise pensions will pull in $12 billion a year in assets. Looking further ahead, the World Bank estimates that these pension assets will exceed $1.8 trillion by 2030.
Roughly 58 percent of mutual fund and closed-end fund assets come from institutional investors, mainly insurers but also banks and other corporations. Individual investors provide the remaining 42 percent. In the retail marketplace some 25 percent of funds are marketed through brokerage firms, with 15 percent sold directly to consumers. But the majority of mutual funds fully 60 percent of the market are sold through the country's banks, mainly the big four.
That sheer distribution power explains why the regulatory change allowing banks to create their own mutual funds is spreading waves of anxiety among independent fund managers. "Many of my clients are saying, 'Banks are coming in, insurers are coming the industry is dead,'" says Z-Ben Advisors' Alexander. "They think everything is going against independent fund managers."
For good reason: China Construction Bank, for example, has 14,500 branches, with total deposits of $336.8 billion. "CCB's firepower is so great," says Rex Auyeung, the Hong Kongbased Asia chief of the bank's partner, Principal International. "We're talking about a massive distribution machine." Rival ICBC boasts customer deposits of $624.7 billion.
"You have to recognize that the banks are emerging as strong competitors," says Singapore-based Choy Peng Wah, Deutsche Asset Management's Asia ex-Japan chief. "Distribution is the difference between success and failure in China." At Harvest Fund Management, 45 percent of sales are generated by its own sales force, with the remaining 55 percent coming from bank distribution channels.
Harvest chief executive officer Zhao Xuejun says his firm will over the next five years try to set up its own distribution network, "like an independent financial adviser." The firm, whose sales force now focuses on institutional clients, will begin by opening a pilot branch office in Shenzhen this month. "The combination of a direct sales team and strong distribution partners built up over the past five to six years will allow Harvest to continue its success," Choy says.
Some 24 percent of mutual fund assets come through insurers, so the fact that the country's top five insurance companies can now set up their own fund companies poses a particular challenge to stand-alone managers. "For independent fund managers, their largest client is coming into the market as their competitor," says consultant Alexander. "That could be a bigger challenge than the banks."
"Competition from insurers will be more severe than from banks," agrees Zhang Jian-yun, director of marketing at Hua An Fund Management Co. in Shanghai, which ranks fourth in the II survey, with assets of $3.3 billion. "Insurance firms account for almost 30 percent of the money we manage, and they already have a lot of management skills. They will be a huge competitor in the future."
Most banks selling funds in China today use an open-architecture system, selling rivals' products as well as their own. But some observers expect that the new bank ventures will favor their own proprietary products, eventually. "Is open architecture dead even before it has really taken off?" asks Cerulli's Taneja. "We assume that when the banks launch their own products, they will favor in-house product and only really promote third-party funds to fill the gaps in their product arrays which, for now at least, are quite sizable."
Many fund executives, however, believe that investment performance rather than distribution prowess will be the key to success in the nascent fund business. "I don't think anyone should fool themselves that the success of this company will be anything but dependent upon our ability to generate good investment performance," says Schroders Asia-Pacific CEO Lester Gray. "That will determine the success of this firm, not the fact that we have Bank of Communications as a partner."
The manager of at least one bank-led joint venture states that his firm will not favor its bank's home-grown products. "ICBC's distribution business is one of its very important businesses, and it will not give it up only for ICBC Credit Suisse," says Beijing-based Guo Tehua, head of ICBC Credit Suisse Asset Management. "Although our kind of company has advantages of great distribution, our success still depends on the performance and design of our products."
Other industry executives believe that there is plenty of growth to go around and that the arrival of new entrants will simply stoke overall demand. "The entry of banks is fantastic news for the industry," says Christopher Ryan, Hong Kongbased Asia-Pacific CEO of ING Investment Management, which owns a minority stake in China Merchants Fund Management. "If you've got three big banks and soon there will be more out there promoting mutual funds to all their millions of customers, it gives us and every other fund manager in the business an enormous number of better-informed investors to talk to."
Joint ventures between foreign and domestic money managers have different leadership structures. In the case of Bank of Communications Schroder Fund Management Co., the chief executive of the new venture is David Lui, a 20-year veteran portfolio manager at Schroders in Shanghai.
"How the company operates and how management responsibilities are arranged is frankly more important than whether you hold a 30 percent, 35 percent or 49 percent stake," says Gray. "Schroders is a pure asset manager, and that's what we bring to this joint venture. Bank of Communications is a very well-established bank in China, with very significant distribution capability. We've got a split of responsibility that we are comfortable with. Is that an absolute protection? Of course not. Is it as good as we think can be achieved in the circumstances? Yes, it is."
Principal and Credit Suisse, by contrast, are clearly junior partners in their joint ventures. "The China Construction Bank is in the front line of this joint venture," acknowledges Principal's Auyeung.
What might happen in two years, say, when the Chinese banks have absorbed their foreign partners' knowledge and expertise? Might the banks then decide to go it alone?
UBS's Kutscher says he deliberately steered away from joint ventures with big banks and insurers. "We decided not to go with a bank or an insurance company because asset management is our core business and we're here for the long haul," he says.
Auyeung contends that if Principal continues to add value to its joint venture, Construction Bank is bound to keep the partnership alive. Still, he acknowledges that the future for fund management joint ventures is clouded in uncertainty.
"There will be turbulence," he says. "Fasten your seat belts."