While no foreign fund management group can claim to have found the most successful formula for fund distribution in China, the growth of sales through online platforms is changing the nature of fund product buying in the country.
This could accelerate further, if the full potential of a newly announced joint venture announced June 10 between Alibaba's Ant Financial and US group Vanguard can be realised.
The tie-up between the two financial giants makes sense, given the rapid onset of online fund sales via non-bank distributors. Research from fund sales research firm Broadridge suggests that online channel sales in the third quarter of last year accounted for 80% of China's total mutual fund sales.
"Digital fund sales in China are going from strength to strength with the growing ubiquity of mobile phones and apps usage," the research firm said.
For 2018 as a whole, sales via top online fund platform Eastmoney ranked as the third-largest distribution channel ($78 billion), behind the bank distribution channels of ICBC and China Merchants Bank.
Currently the bulk of online sales in China are of money market funds, but Broadridge notes that both banks and platforms are building up their robo-advisory services to encourage sales of more complicated products.
"Alibaba’s Ant Financial has already worked with more than 27 Chinese fund firms to create a 'Caifuhao' platform, which enables those firms to engage directly with end-investors," said Singapore-based Yoon Ng, the firm's head of Asia research.
Other internet giants in China have followed suit. Tencent has leveraged the popularity of its WeChat social media platform to sell funds and Chinese search engine Baidu is also licenced to sell funds directly.
Chinese commercial banks are still the most important distribution channel for mutual funds in the country. However, the banks’ distribution dominance has steadily declined since 2013, due to a combination of continuous investment by fund companies into mobile and direct-selling platforms, as well as the rapid development of the fintech industry in China.
“Distribution is the holy grail of success in China – it is absolutely the hardest road,” Gerard De Benedetto, a former head of Guotai Asset Management and AZ Investment Management in China, told AsianInvestor.
It is “wildly expensive” to distribute third party funds via the Chinese banks and “excruciatingly labour-intensive to do it on your own," he added.
OWN BRAND DISTRIBUTION
As reported, foreign managers can now access private fund business in China under their own brands and strategies through investment management Wholly Foreign Owned Enterprises (WFOEs).
At least 37 international companies have established WFOEs, 16 of which have registered to launch onshore private funds, including global players such as Fidelity, UBS and BlackRock.
However, the joint-venture of Ant Financial and Vanguard, the world’s largest mutual fund company with over $5 trillion in assets under management, marks a new stage of collaboration. Public information on the joint venture shows that Ant Financial holds 51% of the shares and Vanguard 49%.
A partnership between the largest fintech company and the largest mutual fund company in the world would appear to be a recipe for global domination.
“This is a massive development for Vanguard with a fintech behemoth that has built-in distribution to over a billion people,” Jonathan Ha, chief executive of Shanghai-based research firm Red Pulse told AsianInvestor.
However, at this stage, the potential of the joint venture is limited by licencing regulations in China.
Eileen Li, head of research at Red Pulse added some context to the Vanguard deal. “It seems like they only have set up an investment consulting firm rather than an actual fund company," she told AsianInvestor.
“Even though Ant Financial has the ability and approval to sell mutual fund products online, currently they are still unable to help Vanguard raise money, as the latter has no investment company, nor has it obtained a licence to set up a WFOE mutual fund company.”
Also, under current regulations, private funds, which many foreign investment companies choose to set up in China, are not allowed to raise money online. "Consequently, relying on internet companies as a channel to raise money may not be the best option for them, at least for now," Li said.
This may explain why Vanguard is currently not making any statements on the venture. AsianInvestor reached out to Vanguard's Shanghai operation, but they declined to comment on the deal with Ant Financial.