Morgan Stanley, others continue China fund JV quest

Foreign entrants grow in China as its mutual funds industry hits Rmb2 trillion, on track to reach Rmb3 trillion ($397 billion) by year-end.
With 32 domestic fund houses still in play in China, more foreigner asset managers are buying their way into the market. Dutch insurance company and pension fund manager Aegon is now taking a 49% stake in Industry Capital Management, while ItalyÆs Eurizon Capital is buying a stake in Shenzhen-based Penghua, a pioneer dating to early 1998 with a 3% market share and $7 billion in capital (and which is developing QDII products with Goldman Sachs).

Now Morgan Stanley Investment Management is rumoured to be aligning with Jutian Fund Management, a Shenzhen-based fund manager that is at present the industryÆs second smallest, ranked 57 out of 58 in terms of market share. Although MSIM executives in Hong Kong would not comment, a Jutian representative in Beijing, Zhao Chunmei, says MSIM has approached the firm about a relationship but that no deal has been finalised.

Such a strategy may reflect the tastes of MSIMÆs new Asia-Pacific CEO, Blair Pickerell, who as former CEO of HSBC Investments had guided it to partner with a tiny provincial entity, Shanxi Investment Trust. Foreigners cannot own more than 49% of a funds JV but they can achieve a level of de-facto control when dealing with weak domestic partners.

Driving this activity is the continued growth of the Chinese mutual funds industry, which is now worth an estimated RMB2 trillion ($234 billion). Assets under management in mutual fund companies grew at 58% in the latest quarter, says the latest report from Z-Ben Advisors, a Shanghai-based industry watchdog group.

The last official figures out of the regulator, the China Securities Regulatory Commission, show the industryÆs assets hitting RMB1.8 billion as of the end of June. Combined with segregated portfolios from the National Council for Social Security Fund and other corporate pension portfolios, the aggregate AUM of the funds industry has reached RMB2 trillion, says Zhao Shengzhang, chief compliance officer at China Merchants Fund Management in Shenzhen.

As the disintermediation of bank savings continues, Zhang How-How, a product analyst at Z-Ben, says the growth of the industry is going to reach an even higher scale, notwithstanding fears by many fund executives that A-share valuations have become unsustainably high.

Under the environment of high economic growth (GDP rose 11.9% last quarter) and rising inflation at 4.4 %, alternatives to equity investment in Chinese stock markets are unpalatable û yuan deposits currently provides a rate of 3.3%, while bonds on average a 4.2%, both providing negative real returns. QDII programs to access overseas markets are embryonic (see AsianInvestor magazineÆs July edition for an in-depth look at QDII).

Moreover, government reforms have improved corporate earnings, transparency in reporting corporate capital and led to higher credit ratings. Many companies, particularly big, listed state-owned enterprises, are making plenty of money and providing healthy returns to shareholders.

Demand for equities continues to grow with the addition of millions of novice investors eager for a piece of the action. Fund distribution channels have expanded as commercial banks introduce these products beyond the four tier-1 metropolises (Beijing, Guangzhou, Shanghai and Shenzhen) to tier-2 cities such as Fuzhou, Nanjing, Tianjin and Xiamen.

Supply is matching that growth, with now 58 fund management companies registered with the China Securities Regulatory Commission, including 26 Sino-foreign joint ventures that claim around 40% of the market. Fund houses have parlayed successful track records against the benchmark during the A-share marketÆs four long years of bear markets into convincing more investors to entrust them with their money.

As a result of these factors, Zhang predicts bank savings will continue to flow into mutual funds for several quarters. The past quarter saw 422 billion new fund units issued, which led to an increase of 55% in total mutual fund shares in the market. Zhang estimates $45 billion of bank deposits were directed into the fund industry in the second quarter of 2007, following $20 billion in the first quarter. Based on these trends, Z-Ben expects the industry to hit RMB3 trillion ($397 billion) by the end of this year.

And investors are paying attention. Performance, more than anything, counts. Better-performing (often smaller, more nimble) competitors, such as GuangzhouÆs E Fund and ShenzhenÆs Yinhua, have enjoyed big inflows û although many of the industryÆs most established firms, members of the æold 10Æ dating back to the industryÆs founding in 1998, remain market leaders in AUM terms (see Z-BenÆs top-10 rankings below).

In addition to the old 10, the other big winners are JVs, of which 10 sit in Z-BenÆs ranking of the top 20 fund companies by asset size. Deutsche Asset Management has a 19.5% stake in Harvest (number three), while China International (number 10) is a JV between Shanghai International Trust and JPMorgan Asset Management.

Invesco Great Wall, Fullgoal Fund Management (with Bank of Montreal), China Merchants (a JV with ING Investment Managers), CCB-Principal, Fortune SGAM, Rongtong (a JV with Nikko Asset Management), ICBC Credit Suisse and Fortis Haitong comprise eight of the second decade of large fund houses.

Ranked by market share of the industry, Z-Ben Advisors ranks the current top 10 fund houses as at June 30, 2007 as û

Top 10 Fund Houses in China as of June 30, 2007
   RankCompanyAUM RMB mAUM $mMkt share %LocationEstablishedNature
   1China Asset Management130149.8517,215.0
BeijingMarch 1998Domestic
   2China Southern127723.6316,894.0
ShenzhenMarch 1998Domestic
   3Harvest Fund Management111830.6914,791.9
BeijingMarch 1999Foreign Invested
GuangzhouMarch 2001Domestic
Shenzhen March 1998Domestic
ShenzhenApril 1999Domestic
ShenzhenMay 2001Domestic
ShanghaiMay 1998Domestic
ZhuhaiJuly 2003Domestic
   10China International56888.807,267.55
ShanghaiApril 2004JV
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