Few markets boast as much long-term potential for fund managers as China. The country’s prodigious savings and extraordinary growth rate make it fertile ground for savvy investors to explore.
Unfortunately for those managers, China can offer as much volatility as opportunity. Rarely has that been as true as during the recent financial crisis. After a massive bull rally that saw the benchmark CSI 300 index surge seven-fold in the space of two years, the index plunged 72 percent from its October 2007 peak to a November 2008 low, then shot up by 133 percent over the next nine months before retreating 12 percent, to stand at 3,320.10 last month.
How does a fund manager keep clients on board during such a roller-coaster ride? For Li Quan, executive vice president in charge of marketing and sales at Shenzhen-based Bosera Asset Management Co., the answer is to be frank with investors and not try to sugarcoat the message.
“We essentially told them, ‘Hold on to your seats. Brace for volatility,’” says Li. “The key is we understand the trends and understand macroeconomics in China and in the world. We must also be clear with our investors and tell them pragmatic viewpoints, and not exaggerate or de-emphasize the potential volatility.”
The stock market’s wild swings certainly left their mark on China’s fund management industry. The China 20, Institutional Investor’s fifth annual exclusive ranking of the country’s largest money managers, saw their total assets under management decline by 27.2 percent in 2008, to a total of $251 billion at the end of last year.
China Asset Management Co. rode out the turbulence better than most. The company retains its position at the top of the ranking and widens its lead over rivals, with assets of $30.8 billion, down just 13.8 percent from a year earlier. Harvest Fund Management Co. rises one place to second, with assets of $28.4 billion, down 17.7 percent on the year. Bosera slips one place to third, with assets off 33.1 percent at $23.6 billion. China Southern Fund Management Co. and E Fund Management Co. round out the top five, as they did a year earlier.
Although the Chinese stock market has bounced back this year, investor confidence hasn’t yet recovered from the 2008 bear market.
“Many investors are still concerned about the global economy,” says Howhow Zhang, an analyst with Z-Ben Advisors, a Shanghai-based asset management consulting firm. “They also are concerned about the central bank’s belt-tightening measures. They benefited from the 4 trillion yuan ($585 billion) fiscal stimulus last year but are worried about liquidity tightening. They also are concerned about property transactions falling. So, many have decided to take profits. Many are looking for a reason to sell.”
Several money management firms have responded to investor unease by coming out with new products less geared to the equity market, or to specific stocks. Firms attracted 53 billion yuan in August with new fund launches. E Fund led the pack, raising 16.7 billion yuan for a new fund indexed to the CSI 300 index. Harvest and Bosera raised 10 billion and 8.8 billion yuan, respectively, with new balanced funds, which invest in a mix of stocks and bonds.
Notwithstanding the market’s volatility and investor nervousness, most executives remain upbeat about the long-term outlook for China’s asset management industry. “Like any other funds market, the Chinese industry has seen peaks and troughs over the past market cycle, but we believe it is the investment needs of the affluent investors and the high savings rates of China that will continue to fuel the growth in assets under management,” says Kevin Hardy, head of Hong Kong–based Northern Trust Global Investments, Asia-Pacific, which advises Chinese fund managers on their overseas investment strategies.
Hardy cites several reasons for optimism about the industry’s future. Demographics remain overwhelmingly favorable, he notes. Hundreds of millions of Chinese are likely to join the ranks of investors in the years ahead. The Chinese save an average of 40 percent of their incomes, but the vast majority of people keep their money in low-yielding bank deposit accounts. Currently only about 100 million of China’s population of 1.3 billion have invested in stocks or in mutual funds. That number seems bound to rise considerably.
The market for institutional mandates is also growing rapidly, Hardy says. Local government and corporate retirement plans, as well as annuity funds catering to small and medium-size enterprises, are increasingly looking to professional managers to handle their money. The World Bank estimates that China’s market for pension-related assets will exceed $1.8 trillion by the year 2030, compared with about $250 billion currently.
Finally, investors are likely to continue to diversify their portfolios, both in terms of types of products and in terms of markets in Asia and around the world, Hardy says. To remain competitive, Chinese fund managers need to offer new products, including overseas investment funds, known as “qualified domestic institutional investors.” Currently, China has approved only nine such funds to invest abroad, but that number is expected to increase dramatically in the years ahead.
Northern Trust, for one, is eagerly looking to exploit that market niche and provide services, ranging from fund administration to supervising foreign fund managers, to Chinese managers. “Like many others, we are engaging Chinese fund management companies in QDII opportunities with respect to our key capabilities in index fund management and manager-of-manager services,” Hardy says.
The Chinese government is also opening up its asset management industry to foreign funds. In September the State Administration of Foreign Exchange, an arm of the central bank, announced that it was increasing the maximum quota for foreign funds approved to invest in China from $800 million to $1 billion each. So far, the China Securities and Regulatory Commission has approved 86 so-called qualified foreign institutional investor licenses, including 11 this year. The combined quotas of those firms is $30 billion, of which about half has actually been invested.
One of the new licensees is Bank of New York Mellon Corp., which now has an application in with authorities to set up a fund with an initial quota of up to $200 million. “We see approval coming in the next six months or so,” says David Jiang, the Asia-Pacific chief executive officer of the bank’s asset management unit in Hong Kong. Ultimately, the firm hopes to develop a family of QFII funds in China with assets of some $10 billion, he says, but that goal will take some years to achieve. Until now, BNY Mellon has been focusing its energies on advising Chinese fund managers on their overseas strategies.
For its part, Bosera is keeping its focus firmly on the domestic market. The firm believes the opportunities for growth are much better there than overseas, at least for the medium term, says Li. Bosera has, however, been sending its fund managers abroad to meet with foreign counterparts and attend seminars and conferences in a bid to upgrade skills. “We sent many to the U.S. to visit top economists as well as top fund managers to learn what was happening,” he says. “China is now integrated with the world, and it’s critical our managers know what is going on to make the right investment strategies.”
Largely as a result of knowledge gained from its managers’ international visits, Bosera has taken a defensive strategy with its portfolios recently, selling down equities and increasing cash to 10 percent of its holdings. The company has also shifted its equity positions, weighting more heavily toward recession-proof industries such as pharmaceuticals, food and beverages, and health care, and avoiding cyclically prone sectors such as export manufacturers, iron and steel, and property. Such a cyclical strategy, common in developed markets, is relatively new in China, where most fund managers have just five or six years of investment experience, much of it in a bull market environment.
“We see volatility ahead,” Li says. “This creates opportunities for value buyers. We are looking for value, especially companies whose share prices have been oversold, companies with great long-term prospects.”
Bosera is also reaching out to investors with an ongoing education campaign. The company holds weekly investor education conferences all over China to teach clients about the importance of “renminbi cost averaging,” or investing the same amount monthly regardless of rising or falling markets. The message appears to be getting through. Bosera’s client base grew to 12 million investors at the end of June from 10 million at the end of 2007, Li claims.
“One thing we learned in this crisis is that Chinese investors are gaining a higher risk profile,” Li says. “This crisis has made many investors more willing to learn, to learn by taking measured risks. This is a good thing for China’s asset management industry in the longer term.”
See related story, “Coming of Age in China”.
Click here to see the China 20 rankings.
