China's rich have begun allocating funds to different assets rather than simply investing through more product-focused strategies but it's still early days and the country's wealth managers could do more to facilitate the trend, AsianInvestor’s 4th China Global Investment Forum in Beijing heard last week.
In a panel discussion Hou Lin, general manager of wealth management products at CreditEase Wealth Management, Zuo Dan, head of offshore markets in private banking at China Minsheng Bank, and Bruce Kang, managing director at Ping An Trust, all agreed that Chinese high-net-worth individuals were increasingly diversifying their investments and becoming more professional in their approach.
“I joined Minsheng in 2013 when the best-selling product was wealth management products. Clients only wanted the product that had the highest return and paid little attention to investment diversification or overseas allocation,” Zuo said. But now clients are accumulating more diversified investments such as quantitative hedging instruments, insurance products, overseas assets like residential properties in Australia and even niche alternatives such as fine wine, he said.
It's a big improvement on several years ago when clients only focused on fixed income investments and real estate assets, but it's still limited to only about 10% of Chinese HNWI portfolios, Kang said.
Could do better
Why that is, despite strong historical evidence showing more diversified portfolios tend to perform better, partly comes down to the capabilities of Chinese wealth managers, whose asset allocation and know-your-customer (KYC) expertise is short of what is required, he said.
Many wealth managers claim that their HNW clients are not patient enough to hold their investments long enough to make proper investment returns but the asset-specific performance targets of many wealth managers are themselves unstable, Kang said.
In China, “there are not many people who are really making asset allocation, and the proportion of those who really make good asset allocation is not high,” he added.
Gregory Van den Bergh, founder and chief executive of Micai, a robo-advisory provider based in Beijing, noted in a presentation at the forum that one big trend over the past 12 months is that many wealth managers in China are changing from product providers into solution providers.
In China, there are about 2,500 wealth managers that focus on HNW clients, but many of them mainly sell fixed income products such as trust funds or real estate, Van den Bergh said.
Though leading firm Noah Holdings only has about 20% of its assets under management in fixed income, with the rest in private equity, venture capital, hedge funds and overseas products, smaller firms—the bulk of the market—primarily sell trust funds, whose returns are going down, Van den Bergh said.
“China’s wealth management industry is very fragmented, with the largest one Noah taking only 2% of the market share, and the top-10, together only 5%-6% of the market share,” he said.
Principal-protected trust funds, which HNW clients used to buy a lot, used to deliver 12% annualised return but that has since come down to 6.5% and is expected to continue dropping to 5% in the next few years, Van den Bergh said.
For KYC, many wealth managers simply ask clients 10 questions to gauge their risk tolerance, Ping An Trust’s Kang said. Actually, they should do much more than that and really dig out clients’ true needs. For example, to help clients construct a family or insurance trust, wealth managers should also ask what the money will be used for to help construct a proper portfolio.
Fund selection challenge
Growing HNWI demand for asset allocation services creates new demands of Chinese banks too.
As Minsheng’s Zuo notes, many of the more diversified investments are mandated to external managers, so one key challenge is to select the right partner organisations.
A second task is to choose the most suitable products, including funds of funds, based on client needs, and to build proper portfolios out of them.
“There is an increasing challenge on product selection and risk management system [buildup],” Zuo said.
Micai's Van Den Bergh estimates total household wealth in China at about Rmb190 trillion ($28.7 trillion), of which Rmb100 trillion is retail and about Rmb90 trillion covers HNWIs. About 30% of the latter, he added, is managed by private banks with the rest managed by wealth managers.
To protect that wealth and ensure its continued healthy growth it’s now critical that wealth managers become more professional, upgrade their asset-allocation capabilities and have good communications with clients to keep them patient, Ping An Trust’s Kang said.