Fan Yonghong has a problem most fund managers would love to have. As president and chief executive officer of China Asset Management Co., Fan has overseen a phenomenal period of growth during which the company has extended its lead as China’s largest fund manager. In the 12 months to August, however, Fan has actually turned away $1.5 billion in fresh money from institutional investors. The reason? He worried that China AMC wouldn’t be able to maintain strong performance if it grew too rapidly, especially at a time of high market volatility.
“In some countries mutual funds normally say ‘the bigger, the better the company,’ because they can charge a fixed rate of fees,” says Fan. “So being bigger is going to attract more income. That is why some Chinese fund managers are striving to increase their assets under management rapidly. The problem is, if they don’t make a good return for investors, that will damage those investors. This creates a crisis of trust.”
So far, Fan has succeeding in maintaining the trust of his investors better than most. China AMC’s assets under management jumped by 46 percent in 2009, to $45 billion, according to the China 20, Institutional Investor’s exclusive ranking of the country’s largest money managers. Those gains lift the company well above industry rivals. Harvest Fund Management Co. holds on to the No. 2 spot in the ranking, with assets of $35.1 billion, up a more modest 23 percent. Bosera Asset Management Co. follows in third place, with $30.7 billion, up 30 percent. E Fund Management Co. moves up one place, to fourth, thanks to a 78 percent surge in assets, to $27.9 billion. And Penghua Fund Management Co. advances one place, to fifth, following a 25 percent rise in assets, to $19.4 billion.
The days of effortless growth for Chinese fund managers have ended, though, with some notable casualties. China Southern Fund Management Co. falls two places on the list, to No. 6. Its assets dropped by 19 percent, to $17.9 billion, at the end of 2009. HFT Investment Management Co., known formerly as Fortis Haitong Investment Management Co., tumbles eight notches, No. 20. Its assets declined by 1 percent, to $8.3 billion.
Increasingly, volatility is the name of the game for Chinese fund managers, as it is for their peers in most other markets. The country’s economy may have staged the most-dramatic comeback from the global economic crisis, with growth currently running at a pace of about 10 percent, but the stock market has been on a roller coaster. From a peak of 5,877 on October 16, 2007, the China Securities Index 300 fell 72 percent, to a low of 1,628 in November 2008, then more than doubled, to 3,787, by August 2009 before easing back again. The benchmark index has oscillated between 2,500 and 3,000 since May and was trading late last month around 2,857.
Those movements have been challenging for fund managers, as assets under management have also seesawed. The industry’s total assets stood at some 2.1 trillion yuan ($308 billion) at the end of June, down from 2.67 trillion yuan at the end of 2009 but up from a 2008 low of 1.89 trillion yuan, according to Shanghai-based Z-Ben Advisors, a firm that tracks China’s asset management industry.
“The financial crisis did have an effect on China but not immediately: It was deferred over half a year,” says China AMC’s Fan. “Retail funds suffered losses, and in some cases investors withdrew money, but the institutional investor base is more stable. Now we return to a period of more stable development, but there are many difficulties still to deal with.”
Strong performance stands out in difficult markets, though. China AMC’s top five equity funds delivered average returns of 40 percent in the 12 months ended March 31, compared with a 33 percent rise in the CSI 300 over the same period. “We do not seek scale as our goal but best performance,” says Fan.
Good returns have enabled China AMC to open a daunting lead over its rivals, says Min Tha Gyaw, an analyst at Z-Ben. “Their top portfolio manager, Wang Yawei, is very good,” says Min. “The company is strong in marketing and distribution. That is backed up by strong performance, and as a result they have a very high investor retention rate. So far they’ve been able to do everything right.”
Other fund managers are looking to sustain growth through innovation. In September, E Fund launched China’s first officially registered hedge fund. It will target both global and domestic institutional investors and will employ a mostly long/short equity strategy, says Liu Zhen, a managing director of E Fund’s index and quantitative unit.
Other firms are eyeing similar moves. Harvest Fund Management, which is 30 percent owned by Deutsche Bank, hired a Hong Kong–based team of fund managers from Deutsche’s asset management arm and created its own Hong Kong subsidiary, Harvest Global Investments. The unit is looking to develop products for global and Chinese investors, and a source close to the company says it has received regulatory approval to launch a Hong Kong–based hedge fund
specializing in H shares. “We are seriously looking at the alternative investment space,” says Michele Bang, CEO of Harvest Global.
Harvest isn’t the only firm looking to grow abroad. Many of the country’s 62 asset managers, including China AMC, Bosera and E Fund, have established Hong Kong offices in the past 18 months to target global investors and wealthy Chinese looking for offshore vehicles.
“I see Chinese asset managers expanding globally in two to three years,” says Daniel Enskat, head of global consulting at Strategic Insight, a firm that advises on global expansion strategies. “Some are planning acquisitions overseas. Opening offices in Hong Kong is the first step in this process.”
Carlo Venes, Hong Kong–based head of Fidelity International’s institutional business in Asia, says Chinese asset managers are beginning to climb a steep learning curve. Fidelity has been hosting portfolio managers in seminars in Hong Kong and London, as well as in Beijing and Shanghai. “We are teaching them how to monitor counterparty risk, do in-house research and not blindly follow credit rating agencies,” Venes says. “They realize the importance of tracking risks and managing risks.”
Notwithstanding all the innovation, there’s still plenty of room to work on the basics. Bosera, for instance, is focusing on changes in the underlying economy and emphasizing stocks likely to benefit from a shift to consumption- rather than export-led growth. “We are investing in companies that produce consumer durables, especially automobiles, electronics and medical equipment,” says CEO Li Zhihui.