UBS Global Asset Management is working on ways to manage assets in China -- but not by setting up a mutual fund joint venture.
It and a few other foreign financial institutions are exploring to what extent they can participate in the young industry for 'collective investment management' schemes, or CIM.
CIM is the up-and-coming industry for local securities companies to manage client assets. The first ones appeared in 2006, and there are now 28 local brokerages operating around 70 CIM platforms, with a total AUM of $16 billion.
The mutual funds industry, by comparison, is 11 years old, involves over 60 players (half of which are Sino-foreign JVs) managing over 500 funds worth around $350 billion.
While mutual funds are both closed- and open-ended, the CIMs launched to date are all closed-end, with a typical maturity of three-to-five years (the CSRC is expected to allow some to be launched with no maturity date). They are designed for wealthier clients able to take risk, with bigger minimum investment sizes (Rmb100,000 for equities or Rmb50,000 for bonds, which is 1,000 times more than a mutual fund's minimum) and no advertising allowed; these are placed privately.
Some people in the mutual funds industry criticise the government's decision to encourage brokers to sell CIMs. The funds industry is the most tightly regulated in China (and profitable), whereas CIMs are more of a free-for-all. Today, CIMs' investment strategies aren't much different from those of funds, but in theory they are more flexible.
More importantly is how they are structured: CIMs can charge performance fees, something that mutual fund houses have long pined for but which the CSRC has refused to grant. The argument goes, therefore, that CIMs' investments are better aligned with client goals. CIMs are meant to provide for a more absolute-return style of investing, although their track record is too short to offer a meaningful comparison to funds.
CIMs also make the playing field for investment products more bumpy, less level, at a time when such differences have been blamed for allowing structured products to be mis-sold. Both mutual funds and CIMs are regulated by the China Securities Regulatory Commission -- but in different departments, with their own agendas.
Beijing, however, seems keen to let brokers manage assets in order to help the industry, which is generally state-owned and unprofitable.
To date, no foreign-invested securities firm has been approved to launch a CIM. However, UBS and Goldman are looking at how they can participate.
Right now, CIMs do not have approval to invest overseas (with one exception), but they are expected to be given rules as qualified domestic institutional investors. Once that occurs, they will be able to provide a broader range of strategies than mutual fund companies, such as real-estate investment trusts, private equity, infrastructure -- even art and wine, if the CSRC allowed it.
The exception is China International Capital Corp, in which Morgan Stanley is a passive minority investor, but its QDII product was launched amid the worst of the financial turmoil, so it's not seen as a bellwether. Morgan Stanley Investment Managers also has a stake in a local funds JV.
UBS Global Asset Management says it is exploring how it can bid to provide advice to a CIM QDII product if UBS Securities China is granted permission to enter the business. Brokers must first be granted approval to set up an asset management division, and, among other requirements, operate it for a year before they can participate in the QDII market.
UBS Securities China began operations in 2006 and is a distinct company separate from UBS Securities, which is a shareholder. UBS already has a minority stake in a mutual-funds JV with State Development Investment Corporation, called UBS SDIC Management Fund Company, which was established in 2005.
Goldman Sachs also says it is exploring ways to participate in this market. It has a relationship -- but no ownership stake -- with Gao Hua Securities. Goldman lent money to its former partner Fang Fenglei to established Gao Hua, and the two have an investment banking JV in China. Gao Hua Securities is considering applying for an asset management license, and if this is granted, and Gao Hua gets into the CIM business, then Goldman Sachs Asset Management could be tapped as an international advisor. GSAM also manages a QFII portfolio.
Credit Suisse has a joint venture with Founder Securities to underwrite securities, and Deutsche Bank has a similar structure with Zhong De Securities. But neither JV is licensed as a brokerage. CS retains a role in a funds joint venture with ICBC, while Deutsche owns 30% of Harvest Fund Management.