China (and Beyond): No Single Strategy in Getting Started
September 21, 2012
The investment fund industry in Asia is nascent.
In China, the business is expected to triple in the next three years. Which means, in 2015, that the business will reach $1.1 trillion in assets, according to Z-Ben Advisors. That is about the size of the exchange-traded fund business alone, in the United States.
Z-Ben believes that the four biggest foreign banks in China are about to be given the ability to create and market mutual funds.
But there is no part of the world with greater immediate growth prospects.
According to the IMF, China’s economy grew 9.2% in 2011 and is projected at 8.4% this year and 8.65% next year.
By comparison, advanced economies are projected to grow at 1.4% this year and 1.9% in 2013.
So how do mutual fund operators and ETF operators get a foothold in Asia, in particular China, if they get started as soon as they read this article?
Philip, do you want to start?
Philip Lin, Director, North Asia, Investment Services, T. Rowe Price: What has worked for us is to focus on pursuing the institutional opportunities directly from the U.S.
Now, we also have offices in Hong Kong and Singapore, and we have been taking advantage of those offices and trying to establish our Hong Kong office as a hub for Asia-based clients. But we do not have a local office within mainland China yet.
And we have been fairly successful in pursuing this strategy. Several distinguished Chinese institutional investors, primarily the sovereign wealth funds, the national pension funds, have been issuing requests for proposals and hiring external managers to outsource part of their assets, and we have been actively participating in these opportunities.
Right now, there is no prerequisite that you have to have a local presence in order to win mandates from these institutional investors. Whether that's going to continue to be the case remains to be seen.
MME: What else?
LIN: There is another segment within the asset management industry that you can also consider participating in as a foreign asset manager. That is the QDII program.
MME: Explain that.
LIN: QDII stands for Qualified Domestic Institutional Investor. What happens is that they allow the domestic qualified fund houses, banks, insurance companies, to manufacture products that will allow Chinese local retail investors to invest overseas. And because they have a tight control over the conversion between (Chinese) renminbi and foreign currencies, the only way the Chinese retail investors now can invest their RMB money into overseas markets is through the QDII.
MME: How can American fund companies operate under this program?
LIN: There are two options. One option is that you find a local partner. With respect to that, there are two ways you can participate.
One is you establish a JV, you find a JV partner, or you can do it through equity participation. You can be a shareholder of an existing fund house or bank or other QDIIs.
The other option is that you can be hired as an advisor to a QDII, to an existing Chinese domestic fund house or bank or other QDIIs.
Under this option, the Chinese QDII will basically outsource the investment or advisory management business to the foreign asset manager.
MME: And you get a fee for being the advisor.
LIN: That's correct. Then you earn a management fee for being an advisor. A discretionary advisor.
Peng Chen, CEO, Dimensional Fund Advisors, Asia (ex Japan): Very similarly, in the QDII program, you can get hired by an insurance company, or by a bank, or by a brokerage house here in the United States, to subadvise part of their money.
So in that sense you are leveraging their distribution.
And so it is quite natural for that combination, because in China, most of these banks and security houses and so on and so forth, don't really have expertise managing money outside of the U.S. What they do have is distribution inside China.
They have a large individual investor base, a lot of wealth being created, as you pointed out. So it is natural for them to reach out to firms that have that kind of expertise.
So predominantly foreign domiciled asset management firms can act as subadvisors. They are saying, "Hey, we have brought in some experienced asset managers to subadvise this."
MME: Is this the fastest way to get going, because you can have a contractual arrangement?
LIN: Yes. Correct.
But the current trend appears to be that the fund houses, which are the major players in this QDII business, are less and less willing to outsource a mandate on a totally discretionary basis.
MME: Because they feel they are getting better at it themselves?
MME: You are teaching them basically how to do it?