The number of institutional investors making standalone allocations to Chinese equity is on the rise – but the relatively high fees charged by A-share managers can present an obstacle for some.

Yet while Western asset owners might feel more comfortable handing their initial China equity mandate to a Western asset manager, they may want to include mainland firms in their search, said one Hong Kong-based senior investment executive at an insurance firm.

“Local Chinese fund managers are typically 30% to 50% cheaper than foreign players for managing A-shares – and in many cases better managers,” he told AsianInvestor on condition of anonymity. “The local firms will undercut the global players because they want to make the sale.”

The large fund houses in China do tend to be a bit cheaper for A-share mandates than international managers, confirmed Nerida Law, Hong Kong-based head of Asia research at investment consultancy Mercer. "It is a very competitive space."

Neither Mercer nor research house Morningstar could provide specific figures on A-share manager fees.

Nerida Law, Mercer

Despite the potential savings to be made, “someone in the US or Europe may not have heard of the likes of [Beijing-based] Citic", the insurance executive said, while Asian asset owners will often hire a homegrown Chinese manager.

Some Western institutions may want to think about doing so if they don't already given the laser focus on keeping costs down these days. UK pensions, for instance, typically need greater budget or flexibility on fees if they to carve out a China equity allocation, noted Gareth Anderson, a member of Mercer's equity research team in London.

After all, the unnamed insurance executive said, mainland fund firms often know more about the local market than overseas players because of their depth of research and knowledge, and often have the best access to IPOs and deals.

Over the years, large Chinese asset managers have raised billions of dollars in Japan and Taiwan, he added, but often didn’t bother to pitch in Europe or the US as they didn't see demand in those regions.

Indeed, some China managers can be so focused on their domestic market that they may lack a strong international distribution team because they don’t spend the money there, the insurance executive added.

There are exceptions to that rule. Harvest Global Investments has offices in London and New York, while Ping An and China Pacific Insurance are building out asset management businesses in Hong Kong with international ambitions.

WEIGHING A-SHARE MANAGERS

There are several factors to be aware of when weighing up onshore homegrown versus international A-share managers.

There are strong portfolio managers and teams at both overseas and Chinese firms, and pros and cons on both sides, Mercer's Law said. For one thing, investment staff turnover tends to be higher at the local managers than the international ones, she added.

Another point Law noted is that the investment process of Chinese firms may have more sector- and market-timing aspects, which can lead to higher portfolio turnover than typically shown by international managers.

Certainly international investors “should seek to gain more comfort when considering a mandate with a local mainland asset management company”, she said. These include integration of environment, social and governance (ESG) factors, reporting capabilities, compliance, and middle/back-office infrastructure.

Something else to bear in mind is that onshore Chinese managers often have larger teams than their international peers, said Jack Yuan, a member of Mercer’s research team in Shanghai. Local players, especially the large ones, usually have at least 10 equity PMs and at least 30 analysts, while foreign managers usually have fewer than 15 dedicated China investment professionals, he told AsianInvestor.

“Of course, the number of investment professionals is not a guarantee of high-quality research,” Yuan added, "but it may provide some advantages on the coverage.”

Offshore managers usually cover stocks from the China Stock Connect universe, which contains around 1,400 to 1,600 names, while onshore ones may aim to cover all 3,800-plus A-shares, he noted. 

Prospective clients should also be aware of the proclivity of homegrown Chinese fund houses to launch new retail products in response to perceived demand, said Tracy Huang, a Hong Kong-based A-share research specialist at Mercer . That's because domestic retail investors form a large percentage of their assets, but it could lead to product proliferation if not carefully managed, Huang added.

CHINA EQUITY MANDATE MOVES

Mercer is advising Border to Coast Pension Partnership, a local authority retirement scheme in the UK, on selecting managers for its first standalone China equity allocation, which may incorporate A- and H-shares as well as ADRs and other instruments. 

In another recent example of such a move, London-based Coal Pension Trustees, which manages the two retirement funds for the UK’s legacy coal mining industry, chose its first two A-share managers last year. It selected Green Court Capital Management, a sub-investment manager of US-based Neuberger Berman, and AQR, a Connecticut-based quantitative fund house.

Moreover, the Alaska Retirement Management Board, the US state's $34 billion pension fund, invited Allianz Global Investors and Schroders to present on their A-share strategies in 2019, before ultimately deciding against making a standalone China equity allocation.

Meanwhile, institutional investors with more experience and familiarity with Asia are confident in hiring entirely homegrown firms. Norway’s $1 trillion sovereign wealth fund, for instance, has employed Shanghai-based Red Gate Asset Management to run a China equity mandate since 2011. 

Dutch pension fund giant APG Asset Management started a knowledge-sharing partnership with Guangzhou-based E Fund Management in 2016, then in early 2018 launched an A-share allocation.

The Dutch institution, which has had an office in Hong Kong since 2007, manages the A-share portfolio internally, with advice from E Fund. APG has since extended its tie-up also to cover onshore Chinese bonds, for which it set up an investment team last year.

The story has been updated to mention that UK pension schemes typically need greater fee budget or flexibility to carve out a China equity allocation.