China’s funds industry is entering the next phase of growth, driven by increased allocations by retail investors, as the financial market continues to de-risk, market access becomes more streamlined, and investor protection and transparency improve, according to Harvest Fund Management.

The Chinese retail funds market has experienced significant development in the last five years as a series of new laws and regulations relating to retail funds have been promulgated or amended. The government has made efforts to shut down less qualified managers as it imposed stringent rules to clamp down on illegal fundraising activities and improve investor protection.

“The domestic fund management industry is ’reforming from the bottom’, as China’s economy undergoes structural changes to deleverage its economy and lower financial risks,” says Li Songlin, Managing Director, Deputy General Manager of Harvest Fund’s retailing and e-commerce business. "From 2017 onwards, we should enter the era of large asset allocations.”

Li sees three key factors driving the fund industry.

“Previously, the market was plagued by high financial leverage, shadow banking and numerous products flooding the market, but the government’s tightening effort has paid off, and we are starting to see the emergence of a much healthier investment environment with clear policies,” says Li.

“Secondly, China’s economic structure is continually being adjusted to ensure future sustainable development, and this includes the removal of excess capacity and a focus on funding the real economy and projects.

“Thirdly, controls to deleverage and derisk the financial sector are seen likely to be in place for the foreseeable future,” says Li.

  Li Songlin

Amid the clean-up, the Chinese government has also called on wealth management and financial institutions to broaden their product offering in line with regulatory standards. “The asset management industry in China is returning to first principles,” says Li.

Meanwhile, assets under management (AUM) across mainland China rose by 36% to 51.8 trillion renminbi in 2016, according to the Asset Management Association of China (AMAC). This volume is expected to rise as the public moves away from a stock-picking mentality towards an investment mindset, and from a single-asset focus to a multi-asset strategy.

“Currently, there is no lack of liquidity in global markets. However, there is a shortage of assets, and this trend will continue in the short term,” says Li. “With the Chinese economy following an L-shaped growth path, the capital market will become more volatile.

“Under such low-yield and high-risk market conditions, the key to unlocking returns lies in effective asset allocations,” he says. “The risk-adjusted returns from these single-asset managers can no longer meet clients’ needs in a more challenging investment environment.”

As Harvest Fund Management offers a series of products ranging from bond, equity, commodity and currency funds to alternative asset funds, the company can provide funds-of-funds investment strategies, which provide greater diversification and resilience amid volatile market conditions.

Li says that asset allocations should be personalised to meet the risk and reward profile and needs of the investor. “Harvest takes into consideration factors, including risk appetite, profit expectation and investment class preference, to help devise the appropriate fund types and strategies.” For instance, with the rise of ‘new economy’ sectors, the company created its Harvest Global Internet Funds to meet clients’ demand.

The firm employs a top-down approach to selecting sectors to invest in, with quantitative and fundamental analysis; and uses bottom-up stock picking to create its portfolios within those sectors. The company employs both active and passive investment strategies to optimise returns for its clients.

As of the end of 2016, Harvest had in excess of US$140 billion in total AUM. “Most of our funds that are focused on China shares listed in both Hong Kong and the mainland have registered an average impressive annual return since their establishment,” says Li. In the first half of 2017, returns from three of Harvest’s public-offering funds meant that they ranked among the top ten equity funds in China.

“We believe in deep fundamental research at Harvest, and every investment is based on insights and data, and an in-depth understanding of both individual companies and industries,” adds Li.