How asset managers can adapt to changes in China
China has continued to liberalise its domestic capital markets over the past year amid efforts to widen access for foreign investors. As of April 1 2020, for example, there is no longer a cap on foreign shareholdings for securities companies and mutual funds.
“These types of initiatives should further improve the standards of Chinese asset managers,” said Jing Lei, chief executive officer of Harvest Fund Management (Harvest). “They promote healthy competition.”
Founded in 1999, Harvest now has 300 investment professionals globally and Rmb 1 trillion ($141 billion) in assets under management.
Most of the firm’s strategies are active investments that create the alpha it aims to deliver for clients. “Passive investment relies on market efficiency and the current status quo. As active investors, we believe in market inefficiency and future,” explained Jing.
Yet there is an increasing trend in China for investors to buy exchange traded fund (ETF) products. According to data from Wind, for example, 54 A-share ETFs were launched from January to October 2019, totalling roughly Rmb 116 billion – way higher than the previous year.
“Passive investments are increasing, but they won’t replace active management,” Jing said. “Passive strategies are more popular in the US because of the relatively mature market. But the Chinese market is constantly changing, therefore active investing still has a lot of room for alpha generation.”
Another trend that asset managers need to capitalise on in China is the ‘policy factor’. With the domestic stock market typically driven by policy changes, it takes many years for foreign investors to understand how things work in reality.
For example, different words used at different times by government officials can have different meanings, imply a different order of priorities and have different implications. It tends to take several years of experience for market participants to properly interpret policy in China.
But as the market opens further, the landscape is developing. “I feel the policy influences are decreasing over time in China,” Jing mentioned when reviewing the past decade. “Policies have become more sustainable and more stable, so changes are less drastic.”
Every industry in China is going through a transformation. Harvest is particularly focused on technology, healthcare and pharmaceutical, and consumption-related industries, given the trends each of these is capitalising on.
Chinese domestic consumers behave differently from their counterparts in the US, for example – something else that investors need to understand. In the US, consumers are used to shopping mall models as people gather around towns. In China, crowds congregate in the cities and evolution in retail habits has gone from local district stores directly to e-commerce platforms.
“It is important for foreign investors to understand that the investment composition is different,” said Jing.
This is included in Harvest‘s fundamental approach as part of its investment process, he added. “Our research coverage trickles down all the way to the third-tier industry classifications in China.”
As a much more complicated market than most internationally, Harvest is targeting its product brand Super ETF to generate smart beta investments by adapting it to domestic market characteristics. Unlike the traditional smart beta approach guided by western investment philosophy and driven by market factors, Super ETF is built upon the fundamental, common drivers for different investment strategies and different industries, through a white-box quantitative approach, with the aim of generating consistent excess returns for investors.
Using artificial intelligence as part of the research process, the cost is relatively cheap to create. “With different types of investors participating, the market structure is changing,” Jing said. “The direct result is the further segmentation of alpha and beta. Each segment can cater to different investors’ needs.”
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