The dash to build asset management operations in China has reached epic proportions, as foreign fund houses rapidly ramp up their mainland ambitions and the rate of applications for investment management licences gains pace.

But it is creating a demand for talent that will be very hard to satisfy, recruiters told AsianInvestor. Institutional investors and wealth managers could ultimately benefit from the new level of China expertise and broader array of products on offer, as more competition offers a wider array of products and the potential for fees to be compressed.

But in the shorter term these investors could see their own teams being raided by fund managers desperate for decent employees. It's a squeeze that will only become more acute as the likes of international insurers, pension schemes and sovereign wealth funds seek to build up their own mainland investment capabilities.

“It’s a feeding frenzy [among international fund houses] like we haven’t seen for a long, long time,” said a Hong Kong-based headhunter who asked not to be named. “This is because we’ve had more significant regulatory change in the past year [easing foreign entry into the mainland funds industry] than we had in four years before that.”

This is understandable, given that China’s private fund industry—covering high-net-worth and institutional investors—tripled in size last year to hit Rmb30.9 trillion ($4.74 trillion) as of end-2017, according to the Asset Management Association of China. That is also a sixfold increase since 2015.

WFOE demand

The rapid growth is encouraging an array of new foreign firms to seek to set up wholly foreign-owned entities (WFOEs) in China.

Another Asia-based recruiter predicted that the number of investment management WFOEs could well more than double from the current 25 to over 50 by the end of 2018. This would come on top of the 15 IM WFOEs that were handed out last year (see table).

These entities can then apply for private fund management (PFM) licences, which allow them to manage and sell funds onshore to wealthy and institutional investors. Ten IM-WFOEs have received PFM licences so far, six of them being awarded since November.

Several more asset managers are planning to set up IM-WFOEs and hire China staff, including smaller firms with minimal resources elsewhere in Asia, said headhunters, declining to name specific institutions. They note that this has led to a sharp growth in demand for capable investment executives.

It’s also leading recruiters to add to their teams to cover this demand. Profile Asia, with its own China WFOE, has 30 staff in Shanghai and 10 in Beijing, and will probably add 10 more mainland staff this year, said Andrew Oliver, the firm's head of the asset and wealth management practice for Asia Pacific. Five of the 40 are focused on asset management, a number that is likely to rise to seven or eight in 2018.

It’s a similar story for rival search firm Heidrick & Struggles. Steven McCrindle, Asia head of the asset management practice, said: “We have taken on more leadership searches for global asset managers in China in the past 12 months than in the previous five years combined.”

Ambitious plans

Moreover, fund firms have grown more ambitious in terms of the teams they plan to put on the ground, said McCrindle, who is also based in Hong Kong.

As recently as last year, some asset managers were staffing their Chinese operations with a handful of client and regulator relationship managers, he noted. “Now the plans we are seeing are far bolder and include investment professionals across equities, fixed income and multi-asset, and the infrastructure to support these investment activities.”

As a result, firms need China country heads with general management skills rather than just strong sales skills and a strong network, he added. And they want those individuals to have strong English as well as Mandarin. “Throw in another extremely important element—cultural fit—and it becomes a real challenge,” said McCrindle.

BlackRock and Schroders—the latest firms to obtain PFM licences, on December 25—said early this month that they have eight and 10 staff in their WFOEs, respectively, and plan to increase those headcounts.

Lieven Debruyne, Asia-Pacific chief executive at Schroders, told AsianInvestor: “Developing our business in China is of key strategic importance and our largest long-term opportunity in the region. As a result we are rapidly expanding our WFOE, as well as our MRF [mutual recognition of funds] and cross-border business.”

The UK firm also has a joint-venture (JV) Chinese asset management firm with Bank of Communications.

Required personnel

Three or four individuals is not enough to effectively run a WFOE that manages private funds, agreed Profile’s Oliver.

“You need one or two senior portfolio managers per asset class, and three to four analysts,” he noted. “If you assume an analyst covers 30-40 stocks, you’re looking at needing six or seven analysts for equities alone, even if you’re only going to cover 250 of the 3,500 stocks in China.”

That’s on top of a general manager, an operations and technology expert, salespeople and a compliance head, he added.

Where will they source this talent? Likely from financial services firms such as investment or private banks; local institutional investors; overseas Chinese professionals and so on, said McCrindle. “The pool of suitable candidates in asset management is simply too shallow to support the expected demand.”

Oliver made a similar point. International fund firms want “unicorns” to oversee their China portfolios, he said: people with experience managing A-shares who speak very good English. “But the reality is that the large domestic fund managers are usually run by Chinese people who haven’t worked overseas.”

Likewise, added Oliver, mainland JVs are generally dominated by the local partners, whose portfolio managers may be very capable but usually lack the level of English sought by international groups.

Rising cost of talent

Of course “unicorns” come at a price. “Heavyweight people know what they’re worth and get paid well,” he noted. “Pay levels [in Chinese asset management] are now becoming comparable with [those in] Hong Kong.”

That said, global firms are not yet paying huge premiums for mainland staff, said McCrindle. “They are being very sensible about it and ensuring the talent they hire is joining for the right reasons rather than just for an increase in compensation.”

Of course, as firms seek to bring in general managers rather than simply sales heads, they will have to pay more for the additional skills needed, he noted. Compensation across the board will rise this year as demand rises.

ASSET MANAGERS' IM-WFOE AND PFM REGISTRATION IN CHINA
(as of December 28, 2017)
Company Date of WFOE establishment
Date of PFM registration
1. Aberdeen Asset Management
September 14, 2015
November 29, 2017
2. Fidelity International September 14, 2015 January 3, 2017
3. Bridgewater Associates
March 7, 2016
 
4. JP Morgan AM August 24, 2016  
5. Hanwha AM October 21, 2016  
6. Mirae AM
February 26, 2008 (Converted on October 24, 2016)  
7. Vanguard November 10, 2016  
8. Neuberger Berman
November 28, 2016
November 9, 2017
9. Allianz Global Investors
December 6, 2016
 
10. Axa IM
December 29, 2016  
11. APS AM
Feburary 15, 2017  
12. Manulife
March 3, 2017  
13. Credit Suisse
March 3, 2017  
14. Value Partners
March 23, 2017
November 9, 2017
15. Invesco
April 13, 2017
November 9, 2017
16. UBS AM
April 18, 2017 July 13, 2017
17. Azimut Holding
May 2, 2017  
18. Man Group
May 3, 2017 September 7, 2017
19. Fullerton Fund Mgmt
June 6, 2017
September 7, 2017
20. Schroders
June 22, 2017 December 25, 2017
21. Winton Capital August 7, 2017  
22. Alliance Bernstein
September 7, 2017  
23. BlackRock September 19, 2017 December 25, 2017
24. Russell Investments
October 20, 2017  
25. BEA Union
October 25, 2017