This week the first Chinese mutual fund house owned by individuals registered its licence, raising hopes that more investment veterans will make similar moves rather than setting up private fund firms, which can only sell to wealthy investors.
But there are several reasons why the flow of star managers from the retail mutual fund sector to the private fund sector is likely to continue, said Liu Shichen, analyst at Shanghai-based consultancy Z-Ben Advisors.
Huian Fund Management registered its company licence in Shanghai on April 25, having received approval to set up from the China Securities Regulatory Commission on April 19. The firm is majority-owned by two shareholders – He Bin and Qin Jun – and there are other seven individual shareholders.
He, who owns 35.7% of the company, was previously deputy general manager of CCB-Principal Asset Management from 2005 to 2015. With a 35.5% stake, Qin was previously deputy chairman of HuaAn Funds, before which he served as assistant chairman and head of distribution development at mainland manager Harvest for 10 years.
Huian is the first mutual fund firm owned by individuals to have won regulatory approval since the revised Securities Investment Funds Law – or the ‘New Fund Law’ took effect in June 2013. The new regulation lowered entry barriers by allowing private fund houses, insurance companies and individuals to set up mutual fund managers. Previously only financial institutions such as banks had been allowed to do so.
The moved was aimed at helping the mutual fund sector to retain talent by allowing individuals to have a share of the profits and more autonomy in developing the business.
However, the new type of ownership structure is unlikely to stem the flow of portfolio managers from the retail to the private fund sector, because they do not typically have enough money or resources to start their own firms, noted Z-Ben's Liu.
The New Fund Law requires individual-owned mutual fund houses to have at least Rmb30 million ($4.6 million) in financial assets and the major shareholder to have at least 10 years’ asset management experience.
What's more, the retail funds market is very tough for those without an existing distribution network. Hence, despite Qin's experience in this area, Huian is likely to find life tough. Without a bank or brokerage as a controlling shareholder, mainland fund firms usually need pay a higher trail fee ratio – in the range of 30-60% of management fees – to sales channels.
And while some have argued that online sales would help reduce distribution costs, Liu said that was not really the case, as the largest digital fund sales platform, Tiantian, now has the leverage to be able to charge a fee ratio similar to that of traditional distributors.
That said, Huian's launch is likely to encourage more senior executives to start their own mutual fund firms (if they have the resources to do so), said Liu. It will also put pressure on mutual fund managers that lack employee stock-ownership plans or other incentive schemes, he added.