Chinese mutual fund firms are facing a shortage of talent as a booming market lures managers away to more lucrative opportunities.
The deregulation of markets and soaring equity prices are encouraging star managers to set up their own private firms and launch their own products.
In response, smaller mutual funds are establishing autonomous units within their firms in order to retain talent by giving them freedom over remuneration and new products.
Financial services research firm Cerulli Associates said in a recent report that the segregated accounts business was a major reason behind managers exploring new businesses and focusing more on active management.
“When equities are in a bull market, there’s lots of demand for product launches, but the private side may have a niche in terms of remuneration in the short term,” said Felix Ng, Singapore-based associate director at Cerulli. “Not just [fund] managers, but we also see people in product teams going from fund companies to brokerage firms.”
Some new and small-sized fund companies have established so-called “business units” - investment teams modelled on private fund firms’ structure in an attempt to retain talent. Shenzhen-based Qianhai Kaiyuan (QHKY) Fund and Shanghai-based Zhong Ou Asset Management established business units last year, while Beijing-based China Post Fund established its own in January.
Unlike the traditional business model at mutual fund firms, such “business units” are relatively independent. The unit leaders, who are mostly portfolio managers, are free to build their own team and have more financial incentives to launch new product.
“The business unit can share the management fee, which provides an incentive to retain talent,” noted January Sun, an analyst at Shanghai-based consultancy Z-Ben Advisors.
Cerulli’s Ng added: “The idea is to provide more autonomy to star managers by allowing them to run all operations within the business unit, including recruitment and determining profit-sharing within the unit.”
China Post Fund, ranked No 35 in terms of AUM among 94 Chinese fund companies as of the end of 2014, set up its business unit this year and established three independent “investment studios” for three key managers in March. Cerulli said that these studios acted as “the platforms for star managers to perform with maximum flexibility, and it allows them to freely utilise the company’s resources.” Such a flexible profit-sharing model is similar to private fund managers’ partnership setup.
However, Z-Ben’s Sun believes the business-unit model will only be initially implemented within new and small-to-mid-tier fund houses in a bid to attract talent and build brand recognition.
“Some [fund companies] are still studying what is the best approach to structure such [business] units, given that there are several issues to be tackled, such as deciding what resources to be within that unit and how best to prevent potential conflict of interests,” said Ng.
He added that the business unit was a good start, but unlikely to make much of an impact on the problem of talent shortage in the short term.
A wave of managers moved into the private fund segment last year by establishing their own firms, which can provide a lucrative share of profits through performance fees charged to clients.
The June 2013 Fund Law allowed private fund managers to set up fund products easier and faster under the Asset Management Association of China’s registration system. In the first quarter, Amac’s registered private securities fund (equities and fixed income) managers increased by 141% to 3,461 managers from the end of 2014. A total of 1,822 new private funds were registered during the same period – this raised the numbers from 3,766 to 5,588 funds with a total AUM of Rmb659 billion ($106 billion).
A soaring equity market has been intensifying the problem. In total, at least 14 star managers moved into the private fund segment in the first quarter of this year, according to data compiled by Beijing-based Gesafe Wealth Advisory. These star managers include Invesco Great Wall’s Wang Penghui, Minsheng Royal Fund’s Yu Daixi, China Universal Asset Management’s Lin Lijun, and Aegon-Industrial Fund’s Chen Yangfang.
China’s equity market has become the second best-performing market in the world, after Venezuela. The Shanghai Stock Exchange Composite index has jumped 38.45% in dollar terms so far this year, as of April 28. Meanwhile, a total of 130 new mutual funds have launched in 2015, raising Rmb238 billion as of April 7, compared to 362 new funds launched during the whole of 2014, according to data compiled by online distributor Eastmoney.com.