China will become the world’s second-largest market for outsourced assets by 2019 and is predicted to originate half of global net new flows into such assets by 2030, predicts a new report by consultancy Casey Quirk.
The rapid growth in the country's asset management will come largely from its fast-growing retail and high-net-worth segments. Chinese investors’ total outsourced assets stood at $2.8 trillion at end 2016, accounting for 4.4% of the global market share. That followed the US (53%) and the UK (6%), said Natalie Wong, senior consultant and one of the authors of the report.
However, the country is expected to outsource a net $1.7 trillion new flows to reach $4.3 trillion by 2019, and then expand three times to $17 trillion through 2030. At that point it will have 10% share of the global outsourced asset market, the report said.
Wong told AsianInvestor that the research defines outsourced assets as being money that retail and and institutional investors give to third-party asset managers to manage.
The report notes that foreign firms should benefit from the outsourcing, with Chinese investors’ foreign investments set to outpace the general increase of the market. Their foreign exposure is expected to rise from the current 10% to 15% by 2030. In dollar terms, that would be an eight-fold increase from $280 billion to $2.55 trillion.
Despite this, the bulk of Chinese investors' assets is expected to remain onshore: “this is a function of both a preference for the familiar and a rational decision to seek higher prospective returns,” the report said.
As a result, the report said that foreign fund houses will need to have a clear Chinese strategy in order to attract local investors.
This could include prioritising asset-raising from local investors, marketing China investment products to their home countries, or focusing on shareholder returns such as through a minority investment in a local fund house, Daniel Celeghin, Casey Quirk Asia Pacific head, told AsianInvestor.
He noted that many big Chinese institutions and ultra high net worth individuals have money both onshore and offshore, so fund houses that can do both can offer more valuable advice. But “this is a distinction that many western [companies] probably don't understand,” Celeghin said.
The report breaks down fund managers in China’s outsourced asset market in 2030 into seven types of company. It predicted that demand for foreign investments will lead foreign asset managers to hold a 6% share of the Chinese asset management market by 2030.
Meanwhile, China champions will hold the largest market stake (45%); non-competitive firms will be next (24%); then global leaders (10%); pan-Asia alternative specialists (7%); bespoke virtual portfolio managers (5%); and China distribution specialists (3%). Casey Quirk did not offer such a breakdown for today’s market in China.
Foreign manager strategy
The opportunities for foreign firms are different in China’s relatively closed fund market from smaller but more open places such as Hong Kong, Celeghin said.
The latter is a relatively open market full of foreign players, and the preference by most Hong Kong investors is for international assets.
China is is more like US market, and very domestically orientated. As a result, foreign managers’ key opportunity—and challenge—is to become more locally engaged and to engage with local players as much as possible, Celeghin said.
Foreign fund managers seeking to develop an A-shares investment capability, that they can market overseas in their home markets would be wise to have an investment team on the ground, he added.
“As we know, Chinese assets have been included in the major indices, the stock indices and later the bond indices. We expect that will make it more important that overseas firms have investment teams in the mainland,” Celeghin said.
Raising assets in China is likely to prove the trickiest hurdle for foreign fund houses, he noted. “If you are looking at immediate asset-raising opportunities then as a western firm in China it’s … not the best place to go,” he said.
But having an onshore capability still makes sense, because it offers a domestic presence and helps the company understand domestic asset classes, both of which are useful to build credibility offshore, Celeghin said.
The other way for foreign managers to penetrate China’s market is to look more actively on the distribution side. This doesn’t have to be via a joint venture, but could instead be with smaller Chinese firms that have licences but lack differentiated products, Celeghin noted.
“For example, there are more than 100 mutual fund companies in China. The top five or six are big and established; the [next] 12 or 15 or 20 are still big firms, but they might be more interested in foreign partners,” Celeghin said.
And the partnership can be in the form of funds of funds or cross-selling agreements, he added. “Western firms should be creative and see what the Chinese firms want.”
The methodology of the white paper’s predicted figures incorporated various factors. They include talks with market participants in China such as mutual funds, private funds, wealth platforms, big financial institutions and regulators; data including the country’s GDP and demographic profile; and the global model that Casey Quirk uses globally in 24 countries and 40 asset classes, Celeghin and Wong told AsianInvestor.