China’s Rmb2.8 trillion ($459.6 billion) mutual fund market remains enticing for foreign asset managers, with many viewing joint ventures as the most appealing way to enter the mainland.

But it remains a very tough proposition build up a profitable and sustainable onshore business, argued a panel at AsianInvestor’s Art of Asset Management conference in Hong Kong this week.

A minimum of 30 staff are typically required for mainland fund house offices, says Gerard De Benedetto, CEO of An Zhong Investment Management, the China subsidiary of Italian firm Azimut Holdings. And they tend to be located in Beijing, Shanghai or Shenzhen – the three most expensive cities in China, he notes.

Then there is the issue of overcrowding in the country’s mutual fund market, De Benedetto says. “It is very difficult to get [investors’] attention when you launch products.”

Ultimately, the cost of staff and infrastructure leads many firms to “burn through money”.

“If you’re talking strategically about entering China at this point, would you spend €100 million to invest in 30% of a top 20 asset management firm?” De Benedetto asked the audience. “It is a pretty big investment and would be difficult in this kind of environment.”

In order to break even, actively managed equity funds need an AUM of at least Rmb5 billion, while for bond funds the figure is Rmb10 billion, says Nathan Lin, general manager of GF International Investment Management, the Hong Kong subsidiary of China’s sixth largest mutual fund house, GF Fund Management.

There are 88 mutual fund houses in China, with the bottom 20 struggling to make a profit, says De Benedetto.

Many mutual fund houses lose money in their first two years after entering the mass retail market, notes Peter Alexander, managing director at Shanghai consultancy Z-Ben Advisors. This is largely due to the variable costs of rolling out products.

Sino-foreign JVs have historically been popular among firms looking to enter China. In 2003, BNP Paribas teamed up with Haitong Securities to set up HFT Investment Management, and Société Générale partnered Baosteel Group to form Fortune SG Fund Management. In 2005, Deutsche Bank took an equity stake in Harvest Asset Management.

But there are options other than JVs for international fund firms seeking opportunities in China. They includes partnering with onshore trust companies or fund houses, which in turn offer advisory services and manage the funds onshore, says De Benedetto.

“There are new and evolving business models that have been very successful. A number of firms are doing very innovative things in terms of platforms, in cooperation with local trust companies and asset managers.”

Moreover, the competitive landscape in China’s funds industry has changed drastically in six years, says GF’s Lin – back then, mutual funds could only be run by mutual fund firms.

But in June this year securities firms and private fund houses were given permission to move into this space, which means foreign firms have more flexibility over their choice of mainland partner.

AZ has several partnerships with onshore trust companies and fund houses, with AZ acting as an adviser. For example, in October it partnered with China Universal to launch a smart-beta index fund.

Foreign managers can also outsource operations to local fund houses or trust companies, which saves them the time and cost of building up the infrastructure internally.

And panellists agree that deregulation on the mainland will continue. “In five years, China will be much more open and much more liberal and highly deregulated,” Alexander says.