Invesco has applied for and anticipates receiving an investment management wholly foreign-owned enterprise (IM-WFOE) licence in China the next month or two, AsianInvestor can reveal. This will enable the US fund house to offer investment products to both local and offshore investors
It would be the firm's fourth WFOE, adding to real estate licences in both Shanghai and Tianjin and an advisory WFOE in Shanghai.
Andrew Lo, head of Asia Pacific at Invesco, told AsianInvestor the new WFOE was part of the firm's plan to offer as comprehensive a product suite to mainland investors as possible. The company already operates a fund management joint venture in China, Invesco Great Wall.
“We believe that having both a JV and WFOE are complimentary licences that serve Chinese investors well,” he told AsianInvestor.
The aim is to register the new WFOE with the Asset Management Association of China so that it can manage private funds. Lo said the new IM-WFOE would operate from Shanghai’s free trade zone (FTZ) and will require a new office and staff.
The first IM-WFOEs look set to receive registration approval with Amac in the next month or two, as reported by AsianInvestor this week. Invesco would join a pipeline of international fund managers seeking such approval, which allow them to offer fund products in their own name as well as more generic investment services.
The decision of Invesco to operate both a JV and a set of WFOEs has raised some eyebrows, given the potential of its entities to end up in competition with each other for client attention. But Lo (pictured below) told AsianInvestor the entities would focus on different areas.
The WFOE will provide on-the-ground support to Invesco's Hong Kong-based greater China investment team, which offers Chinese investment products to foreign investors, Lo said. “We will also offer private funds to domestic investors in China. As for the JV, our primary focus will be products for the local retail/institutional market in China.”
He declined to specify which investment products Invesco would initially seek to offer via its IM-WFOE and other vehicles. But targeting local institutional investors in addition to offering local products offshore is an important part of its plan.
“We see significant opportunities in this area as there is a growing demand from Chinese institutions to diversify fund managers with different investment styles,” said Lo. The number of local asset owners looking to outsource assets to fund managers is rising, as many insurers and pension companies see their asset bases swell.
Invesco's desire to use the IM-WFOE to create China funds for international investors also makes sense, given a marked increase in foreign interest for mainland fixed income products in particular. In October HSBC said the year-to-date foreign investor purchases of local bonds had surged to Rmb174 billion ($26 billion), five times the total amount recorded in 2015.
Some other fund managers have chosen to upgrade existing WFOEs with additional licences, rather than establish entirely new operations. Lo said Invesco’s decision to set up a completely new WFOE was down to the regulatory constraints of establishing such entities in China.
“Currently you can only hold the WFOE investment management licences in Tianjin and the FTZ in Shanghai,” Lo said. “We hold an advisory licence in Beijing, which cannot conduct investment management activities. We currently do have other WFOEs set up in Shenzhen and Shanghai, but they focus on real estate activities and are only advisory in nature.
"The establishment of this new WFOE in Shanghai will provide long-term opportunities for the company in terms of the QDII2 scheme and other potential Shanghai FTZ initiatives.”
QDII2 refers to the qualified domestic individual investor programe, which was set to launch in late 2015. It would have allowed investors resident in approved zones such as the Shanghai FTZ who had Rmb1 million in investable assets to benefit from relaxed currency conversion rules to make offshore investments. It followed on from the existing qualified domestic institutional investor scheme (QDII), which let investment organisations and fund managers invest offshore.
However, Chinese regulators halted new QDII and QDII2 activity in February, to slow capital outflows from the country amid renminbi weakening.
Invesco Great Wall has a QDII licence but its quota has been used up. But Lo said: “We believe there will be an opportunity once the quota for QDII and QDLP [the qualified domestic limited partnership scheme] is available for both entities."
Invesco had around $75 billion in assets under management in Asia Pacific at the end of 2015. This has gone up to $95 billion as of end-October, of which $21 billion is located in China.
In April Invesco came fourth in Z-Ben Advisors' ranking of foreign fund houses by the strength of their onshore, inbound and outbound business in China. Breaking down the ranking into the three components, the firm came third in the onshore category.