SAFE allows customised QDII products

Customisation will allow fund houses to chase æstickierÆ assets from high-net-worth clients and change the status quo through innovation.

After a long year of inactivity in the QDII industry in China, fund houses are revving their engines for a new round of competition as the State Administration of Foreign Exchange (SAFE) finally approves new forex quotas for the industry to invest in overseas markets. SAFE has waited at least five months to make its move since global markets bottomed out in March this year.

Instead of approving the mass market-oriented QDII mutual funds that have been lined up on the roster for over a year, the forex regulator has opted to wave through a number of QDII fund houses that want to raise assets for customised QDII products. The new approvals are taking place at SAFE while the QFII and QDII supervisory units at the China Securities Regulatory Commission receive a facelift, where new regulators are said to be replacing existing employees that have come to the end of their terms.

According to Howhow Zhang, an analyst at Z-Ben Advisors in Shanghai, five fund houses are known to have gained the essential go-ahead from SAFE. These include Harvest (the new owner of Deutsche's Asian equities platform), Fortis Haitong (the leading performer and one of two QDII fund houses that have managed to make gains in overseas investments), Fortune SGAM, China Asset Management and Southern Fund.

In particular, according to sources, BNP Paribas is understood to have communicated with the CSRC its intention to keep its stake in the Fortis Haitong joint venture. The move has helped clear the regulatory barrier that would otherwise freeze all product approvals for Fortis Haitong because of the earlier uncertainty in its shareholding status.

These fund houses have been allocated a new batch of FX quotas for the new products; these quotas are separate from the existing quotas they have already received for their mass-market-oriented QDII funds. Among the current batch of approved products, H-shares and Chinese concept overseas stocks are recurrent themes. Dollar-denominated fixed income, meanwhile, is one unexpected surprise that has appeared on ChinaAMC's roster.

These new lines of customised QDII products are now colloquially referred to as "Yi dui duo" or "One-to-many" in the industry. And they are the fund industry's answer to offering high-end Chinese clients tailor-made, sexier, more discreet and better performing products with more flexible, but more lucrative, fee arrangements compared to mass-market mutual funds.

These allow fund houses to raise assets in general partnership-limited arrangements not unlike hedge funds in overseas markets. Minimum investment starts from Rmb100 million, while minimum ticket size starts from Rmb500 million for the issuing fund house. In each of these products, fund houses are allowed to take in a maximum of 200 investors as "limited partners"; and each time, the fund houses are allowed to submit up to five Yi dui duo products -- either for domestic securities or QDII offshore investments to the regulators for approval.

Yi dui duo is a follow-up act to the segregated account business that the China Securities Regulatory Commission opened up for fund houses last year. Segregated accounts allow fund houses to pursue assets from even higher tiers of high-net-worth, corporate or institutional clients. Both Yi dui duo and segregated accounts allow the mutual fund industry to compete on a level-field with so-called 'private funds' in the mainland.

But more importantly, these products will allow fund managers to cater to the needs of high-end clients through greater customisation. The drive will allow fund managers to change the status quo in the competitive landscape, where there is little to no differentiation between the 500+ equities, balanced, fixed income, money market or passive funds.

The ability to sell customised products will also encourage stickier AUM that will bolter asset stability in the otherwise volatile retail-driven fund industry. Fund houses will be able to bolster their margins from direct sales channels, where they do not have to split management fees with distributors to get on bank product shelves or sign onto expensive custodian deals tied to dominant distributors. Banks, meanwhile, will also stand to benefit as they get to bolster product offerings for their nascent private banking businesses.

More than 30 domestic Yi dui duo products are due to arrive on local market shelves. Observers say the new wave of products is stretching the already tight resources of investment teams at fund houses.

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