In a recent webinar I shared the latest trends in Asia funds distribution with an invited audience. Jasmine Baker from Z-Ben joined me to outline the key forces in China asset management. Z-Ben is a China-focussed data analytics firm providing in-depth and actionable market intelligence and strategic advice to global asset managers and financial service providers.
It seems to me that fund managers in the region are focussing on financial technology. As distributors, platform providers and fund managers go about refining their digital strategies, they are all most interested in implementing robo-advisory. In doing so they are trying to complement existing interactions with clients rather than replacing them.
Country by country assessment
There are three key developments: fin-tech, FundRich and B shares. Banks are using robo advisory and providing accounts in which clients have their portfolios managed actively through artificial intelligence code, including portfolio rebalancing to keep them on track with their target returns.
The Taiwan Depository and Clearing Corporation’s (TDCC) affiliate FundRich, the Taiwanese version of a fund platform, has grown in popularity since its launch in early 2017. Clients can now purchase directly from a bank, an insurer or from FundRich. Calastone is working with TDCC to fully automate the so-called non-Trust flows coming from FundRich.
B shares – back-end fee type funds – are back in favour, having been stopped by the regulators for a couple of years. Fund managers are now offering different types of back-end fee funds.
Banks and insurance companies will rapidly outstrip other institutions in the region in digitalisation, including the calculating and presenting of daily reconciliation and data for dividends.
There is a drive from agent banks, distributors and fund managers to iron out the complex flows of transactions concerning the Singaporean pension fund (CPF).
The Asian Region Funds Passport (ARFP) is making most of the headlines. Japan, Australia, Korea, New Zealand, Thailand and Phillippines have signed up to the memorandum of co-operation. ARFP will increase the popularity of passport funds and will encourage financial talent to gain knowledge about them and their application in the Asia Pacific region. Kelly O’Dwyer, Australia’s Minister of Revenue and Financial Services, has got behind the ARFP and recently met fund managers from across the region at the Hong Kong Financial Forum.
The ASEAN Collection Investment Scheme, which covers Singapore, Malaysia and Thailand is not being as widely used. Last but not least, the Mutual Recognition of Funds (MRF) between Hong Kong and China, allows a Hong Kong domiciled fund to be sold into China and vice versa. Each individual fund needs to be approved by both regulators, which has resulted in only a slow take-up of the opportunity. However, in the last couple of months a number of new funds have been approved and MRF should be treated as a long-term project.
China asset management
Jasmine Baker from Z-Ben advisors spoke about recent developments in China asset management and what they mean for global managers. She addressed how to enter the market through MRF, other cross-border investment schemes, and building a business on-shore. WFOE is a wholly foreign-owned entity which offers 100% control of an on-shore China asset management business. The advent of the investment management WFOE or private fund WFOE in 2017 has been the biggest step forward for access to China’s asset management market.
While it’s not possible to target mass market retail investors on-shore with a WFOE, global managers have begun to do this via the MRF programme. It’s been a slow-burn since its 2015 launch but the programme has grown to just below USD 2bn and Z-Ben predicts a potential size of USD 44bn by 2022.
The public fund market in China is growing rapidly, to a predicted USD12tn by 2027, so far without defined contribution pension flows. About 80% of investors are mass retail, resulting in some volatility and the global passive fund revolution has not happened yet.
The ETF market is around USD30bn, which Z-Ben expects to grow to USD85bn by 2022. The pension reform now in progress will be a big contributor to the fund market and especially to ETF. Fund managers therefore need to design their products for today’s very different China demand environment while also targeting niches which may be about to widen to mass market.
Domestic banks are the number one port of call for investors, especially the big four state-owned banks and the leading commercial banks. The experience of fund managers so far is that success requires a strategic rollout over an integrated and comprehensive set of platforms. Online and mobile should be integrated into a broader distribution strategy but are no silver bullets.
Institutional investors are looking for new ways to invest assets, perhaps to the advantage of the mutual and private fund industry, as regulatory reforms encourage institutions away from shadow banking.
2017 was a landmark year for reform in China with unprecedented coordination between the regulators to standardise the industry and deliver operational clarity for global managers. The strategic and economic dialogue between the US and China and economic and financial dialogue between the UK and China push forward these changes. In prospect is an extension of the MRF scheme to include London. As key reforms, such as those around pensions, play out in 2018, there will undoubtedly be a host of business opportunities for global managers.