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This expansion is a timely move as foreign managers prepare for further market liberalization in 2020
December 2019, SINGAPORE—The adoption of a fee-based investment advisory model will not only help mature China’s mutual fund industry, it will set the stage for more healthy competition among managers as the industry opens up to more foreign participation next year. These are some of the key findings of the 4Q 2019 Strategic Overview—part of Cerulli’s research initiative, titled Asset Management in China 2019. This research initiative is divided into three parts: an annual report and two supplementary reports during the year.
In the first nine months of 2019, China’s mutual fund assets under management (AUM) grew 4.2% to reach RMB13.5 trillion (US$1.9 trillion) but saw net new outflows amounted to RMB171.2, mainly due to net outflows of RMB506.3 billion from money market funds (MMFs). At the time of writing, MMFs provided an annualized return of less than 2.5% on average, which is unattractive compared to many other fixed-income products in the market.
Against this backdrop, the China Securities Regulatory Commission (CSRC) announced a scheme in October to test the investment advisory business in mutual fund investments. The pilot allows managers and distributors to tailor investment options for clients based on their financial status and financial management needs, and charge service fees of no more than 5% of investors’ net asset value. All five advisors in the first approved batch are fund managers or their subsidiaries. No third-party online platform, such as Eastmoney, Ant Financial, and Tencent, has been included in the pilot scheme yet, possibly due to higher risks resulting from their huge user base.
These institutions face many challenges in exploring the investment advisory business. Chinese investors are extremely new to the fee-based model, and their knowledge of asset allocation remains low. “On a positive note, however, this long-awaited scheme to spur the industry’s transition from a sales-driven model to an advisory-based model will help create more healthy competition for both domestic and foreign managers,” says Miao Hui, a senior analyst with Cerulli, who leads the China research initiative.
The move is timely as more global managers are expected to increase their participation in the market, with limits on foreign ownership of fund management companies set to be removed from April 1, 2020, ahead of the previous proposed deadline of 2021. Cerulli notes that nine managers have injected a total of US$80 million in assets into their WFOEs’ registered capital in the first 10 months of 2019. This shows that some foreign managers plan to expand their onshore presence, thereby assuring local regulators of their commitment to the market.
As of Oct. 30, 22 WFOEs have registered as private securities fund (PSF) managers, launching a total of 56 PSFs. According to local news reports, these managers’ total AUM reached almost RMB6 billion as of Oct. 21. WFOEs’ product offerings have also become more diverse. UBS and Schroders have launched three funds of hedge funds, while Man Group, Neuberger Berman, Winton Capital and D.E. Shaw have all debuted quantitative funds, and seven managers have been qualified to provide advisory services to institutions.
NOTES TO EDITORS:
These findings and more are from The Cerulli Report―Asset Management in China 2019. Leveraging 14 years of our Greater China coverage, this report focuses on several key areas in China’s asset management industry: market sizing, product development, distribution strategies, key regulatory developments, and competitive landscape. This year’s 4Q supplementary report also includes a discussion of other key themes, including investment advisory, insurance outsourcing, and foreign participation.
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