China’s asset management industry saw a record number of new product launches in the fourth quarter of 2010, driving overall AUM up 4.6% despite the highest redemption rate in three years.
A total of 47 products were launched in the quarter, with over half of all managers using these to boost end-of-year market share, notes consultancy Z-Ben Advisers. By the end of 2010, industry AUM stood at Rmb2.5 trillion ($380 billion), from Rmb2.38 trillion for Q3.
Some Rmb127 billion was raised via new product flows in the fourth quarter, which, combined with returns of Rmb124.5 billion, more than compensated for Rmb140.7 billion in organic outflows.
Z-Ben suggests a streamlined product approval process coupled with market volatility were key factors in pushing new product inflows.
But fund churn hit an all-time high as investors sought to sell underperforming products in favour of the newest launches. Mostly they chose to swap existing funds for new equity and bond funds, with new equity funds recording inflows of Rmb23 billion and bond funds Rmb9.4 billion.
As a result, many firms have seen increasingly higher redemptions from new product offerings, making new products with a limited track record particularly vulnerable to outflows.
Qualified domestic institutional investor (QDII) funds and guaranteed funds were the only product categories to see AUM fall in Q4. Total QDII assets fell 1.75% to Rmb72.9 billion, with weak demand for new product offers unable to offset organic outflows.
But Z-Ben believes QDII funds will see a resurgence in 2011 as firms look to round out their portfolios. By the end of this year it expects QDII funds to almost triple in number to 70, from 27 at the start of the year. It projects that redemptions will be far less severe than in previous years.
But while Z-Ben suspects that fundraising for new product launches will decline in the first quarter of this year – meaning fund managers may see lower churn – it is still predicting a record level of launches this year.
The Shanghai-based firm believes at least 170 new funds will emerge in 2011, taking the total close to 800. It expects industry AUM to rise 24% to Rmb3.1 trillion, marginally below the peak of Rmb3.2 trillion in 2007. This figure is projected to hit $1 trillion by the end of the decade.
Such forecasts raise a key question about distribution, given that an estimated 70-80% of market share is in the hands of China’s four largest banks (ICBC, CCB, BOC and Agricultural Bank).
“If more funds are approved and there is still the same number of distributors, there might be distribution channel saturation,” says Francois Guilloux, director of regional sales for Z-Ben.
He anticipates more alternative distribution channels in 2011, including smaller banks and independent financial advisers (IFAs), the latter of which were recently allowed to apply for licences to sell and distribute funds. FMCs may also develop direct distribution themselves.
Distribution forms a key plank under China’s fund management law, which is undergoing revision and is widely hoped will be published this year. Among other things, it would likely clarify the position of China’s unregulated private funds industry, which has more than doubled in AUM over the past six months to Rmb100 billion, by estimates.
In terms of China’s QDII universe, Guilloux expects two trends to emerge in 2011. The first is a move from vanilla equity products into more passive fund-of-fund structures. This, he says, is due to cost considerations, with a mismatch apparent between the number of funds being launched and the amount raised (at an average of Rmb580 million per launch).
“This is low compared to the first batch of QDII, which was around Rmb25-30 billion per fund,” notes Guilloux. “This is putting a lot of pressure on fund management companies, so they will be looking at more ETF products and index funds.”
The second trend he expects is for QDIIs to transition from a focus on Hong Kong/Asia and global asset allocation to emerging-market and asset-class-specific products. “FMCs need to develop more cost-efficient product structure as well as invest in assets that provide a hedge against inflation or RMB appreciation,” notes Guilloux.
Further, he expects institutional investors to speed up the development of their overseas asset allocation this year, particularly into alternative assets.
China has more than 100 insurance firms, but just 25 have a QDII licence, enabling them to invest up to 15% of their assets overseas. At present, Z-Ben says they are investing an average of just 3-6% of overall assets abroad.
In fact, Z-Ben argues that 2011 will be the first year in which foreign firms will really need to keep a close watch on the expansion of Chinese competition.
A total of 11 fund management companies have established a beachhead in Hong Kong, where half a dozen Chinese securities companies already operate. So, too, insurance firms and other institutions have established asset management arms in Hong Kong.
“This year we predict they will take the first steps towards acquiring western competitors’ clients,” says Guilloux, who identifies Greater China as the likely battleground.
He notes that in 2010, qualified foreign institutional investor (QFII) funds investing in China’s equity market have underperformed domestic Chinese counterparts by 10%. “This is promising for Chinese fund managers to acquire new international mandates,” he suggests.