Focus on Asia – China’s economic miracle to be rivalled by fund growth, says Citi study

China’s explosive growth has been good for the stuttering global economy recently. In future it could also be a boon for asset managers, as the mutual fund market there could nearly triple to $1trn by 2015, according to research by Z-Ben Advisors.

The study, sponsored by Citi, suggested after this projected almost-tripling – from $360bn now to $1trn – the assets in public funds could then double again, between 2015 and 2020.

The report’s authors highlight development of the local fund management industry, development of the currency, and of China’s pension system to “meet the demographic challenge of the rapidly aging population”.

Another driver of growth could be a closing of the gap between China’s share of global stock market size, at about 11%, and the average allocation of 0.1% that global investors have to listed companies there.

“Economic development has led to a large and growing middle class in China, however there has been a disconnect between Chinese savers becoming wealthier, but not investing their money,” adds Peter Alexander, managing director at Z-Ben Advisors in Shanghai.

“Regulators are keen to jump on this and to provide a stable environment that will underpin the country’s objectives for more big-picture economic growth.”

But Stewart Aldcroft, senior advisor to Citi Transaction Services in Asia Pacific notes “while continued liberalization offers hope, it does not necessarily bring simplicity. An on-the-ground presence and a clear strategy to structure a market entry effort can maximize the chance of success.”

One key challenge for asset managers wanting to share in the growth in China’s market will be distribution. Z-Ben Advisors notes, although China has open architecture for retail financial product sales, domestic banks are the dominant channel for distribution.

Z-Ben Advisors says China’s institutional fund marketplace “offers more near-term opportunities for asset managers”.

But for which strategies?

China’s large sovereign wealth fund, China Investment Corporation, “will soon transition from its first generation of managers. Expect manager turnover in favor of alternative asset classes, and niche traditional managers with a strong performance track record”.

Z-Ben’s study predicts China’s institutional buyers will be driven by the need to diversify exposures, investing ever more into offshore markets, “ready or not”.

Expect tilts towards private equity, equities and alternatives in their search for “higher returns and lower correlations. Finding the right match for each new client, however, will prove extremely challenging.

“China’s institutional market will become much broader over the next decade as a large number of smaller players, including insurers and pensions, make their debuts. Targeting these will require a much more active approach, as few have experience dealing with global managers or markets,” the researchers add.

At a strategy level, the study says ETF products have already developed quickly “with positive regulatory support” while private equity and hedge fund-type investments will “continue to gather momentum”.

At a business strategy level, the study suggests foreign asset managers put “offshore subsidiaries of Chinese financial firms…much higher on their radar screens [as] no foreign firm will be able to equal their access to the domestic Chinese market in the next 10 years.”

In terms of their present distribution strategies, managers should note among China’s retail investors, “buy-and-hold strategies are uncommon and considered unwise. As a result, marketing and reputation management are significantly less effective than in the West. Investors will remain extremely fickle and quick to churn.”

On the positive side, though, it notes: “Demand for foreign investment options, motivated by an acute need for diversification, is running far ahead of regulators’ control.

“Near-permanent Chinese interest in real estate, private equity and absolute returns should be assumed. Regulators will move quickly to create manageable channels for this money to reach qualified managers.”

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