The domestic equity focus of fund managers in mainland China helped to swell their assets by an average of 56% last year, easily the highest growth rate in the world, new research finds.

By contrast, North American, Australian and European managers saw assets under management (AUM) increase by 28%, 20% and 6%, respectively, in 2009. Assets for Japanese managers remained static.

The surge in China is being driven by an unprecedented demand for mutual funds by retail investors as China’s economic growth continues to lift per capita income in the world’s most populous country.

The proliferation of new funds in China is also a contributory factor, says Mark Brugner, head of manager research for Asia at Towers Watson. The consultancy carried out research with US publication Pensions & Investments for their World 500, a global ranking of asset managers released this week (see last year's results).

“In 2008 markets globally did very poorly," says Brugner. "If you look at the China A-share market, using the FTSE Xinhua 600 index as a proxy, it corrected by over 60% that year, but bounced back by over 80% in 2009.

“If you look at mainland managers, they are predominantly exposed to domestic equity markets, which has pushed them up the rankings relative to peers who are more likely invested geographically and across asset classes. It is a concentration versus diversification story.”

Denoting China's rise through the ranks, 15 Chinese asset managers have entered the World 500 over the past five years, including seven in 2009.

China Asset Management has been the biggest mover globally, rising from 496th place in 2005 to 194th in 2009. Last year China’s two fastest growing houses were E. Fund Management (254th place) and Guotai Fund Management (425th), which both grew assets more than 80%.

However, Brugner also points out that a strong correction in the A-share market could quickly reverse this trend. “Many mainland China managers have shown determination to be global players with overseas expansion that has helped boost their asset growth,” he adds.

“The qualified domestic institutional investor (QDII) programme [enabling domestic players to invest overseas] is definitely a focus of many managers. It will continue to be an area of focus, but at what pace is the question.”

Globally, assets managed by the world’s largest 500 fund firms rose by 16% in 2009 to $62 trillion at the end of the year, compared with a 23% loss the year before. Last year’s percentage rise was the second highest since the research began, although assets are still below 2006 levels.

The research shows that only half of the fastest growing firms over the last five years have done so in a primarily organic way, with the other half doing so by merger or acquisition.

Asked whether he anticipated stronger M&A activity among asset managers in China given the rise in new funds, Brugner says: “That is not something we have seen in the past, but over the long term it will likely just be a natural function of the market."

Notably, passive managers have seen their assets grow consistently over the past 10 years. Last year saw a 62% rise in passively managed assets to $7.3 trillion, largely reflecting the inclusion of BlackRock’s passive assets in the survey for the first time.

BlackRock overtook State Street as the world’s largest passive manager with $1.7 trillion following its merger with Barclays Global Investors last year.

“Passive management remains a growth business as more institutional investors have concluded that their governance arrangements are stretched thin in overseeing the successful active management of their assets and have added to their passive core,” adds Brugner.