China Life, Pacific Insurance and Ping An -- three of China’s biggest life insurance companies -- are preparing to become the mainland’s first institutional investors in mutual funds managed for them on a discretionary basis by domestic fund managers.

To date, institutional investors -- insurance companies and the pension funds of state-owned enterprises -- have been allowed to invest in pooled mutual funds. But given their size, they have long wanted the opportunity to have investment vehicles tailored for them.

Shenzhen-based China Southern Fund Management has a Rmb 6 billion ($723 million) contract from China Life, the largest mainland life insurance company in terms of assets, to launch what is expected to be the first such fund, says Guo Liang-yu, general manager at China Southern. The firm is still waiting for the green light from China Securities Regulatory Commission (CSRC), which he hopes to get before the end of this year.

While the fund managed for China Life will initially contain investments just from the insurer, China Life may later solicit money on its own from other small insurance companies to invest in the fund, according to Guo. But from the point of view of the fund manager, there will be only one client.

Fund managers in China say it is impossible to quantify the potential size of the institutional market, but say it should be at least as big as the retail market. Fees on discretionary funds, however, will be lower than the industry standard management fee of 1.5% on closed-end mutual funds.

The funds established for the life insurance companies will initially be closed-end, says Guo, even though they may be launched after the first open-ended funds come online later this year. Several fund managers, including China Southern and Shanghai-based Hua An Fund Management, have received permission to launch these but are still putting together the necessary systems, distribution and trust arrangements. Once regulators are comfortable with the retail version, discretionary accounts are expected to change to open-ended vehicles a year after they are launched.

It is unclear to what degree Sino-foreign joint ventures, as envisaged under the terms of China’s entry to the World Trade Organization, will be allowed to manage discretionary funds.