Wealthy Chinese warm to alternatives, accept lower returns

High-net-worth clients are becoming more open to foreign alternative assets and more realistic about the level of yield they expect, said speakers at an AsianInvestor forum.
Wealthy Chinese warm to alternatives, accept lower returns

China Minsheng Bank's wealthy clients are showing rising interest in foreign alternative sets and lowering their return expectations, amid mainland stock market gloom and falling yields from fixed income products, said Zuo Dan head of offshore markets for the firm’s private bank.

After the mainland stock crash started in mid-2015, Chinese investors started warming to the concept of diversification, especially in respect of alternative assets, said Zuo, speaking at AsianInvestor’s recent China Global Investment Forum in Beijing late last month.

Beijing-based China Minsheng has put a lot of effort into educating its high-net-worth clients on overseas alternative assets and now believes they are useful tools, he noted during a panel discussion entitled “Coping with global low return – are alternative investments the answer?”

Alternatives appetite

Mainland investors are not seeing many assets offering high returns, which is forcing them to move into new areas such as overseas alternatives, Zuo added.

Certainly, Chinese wealth managers such as Noah Holdings and CreditEase say their clients are increasingly adding offshore exposure in venture capital and private equity funds, as well as dollar-denominated real estate assets.

Chinese commercial banks’ clients are relatively  conservative and used to rely on high-yield income from banks’ wealth management products (WMPs), which once generated 6% a year with a capital guarantee. But Zuo said his clients were getting frustrated as WMPs were not offering that level of return any more.

Yields on domestic fixed-income products has dropped significantly over the past two years amid China’s economic slowdown. The onshore 10-year government bond yield stood at 2.75% as of Friday, down from 3.65% as of end-2014. The average yield of mainland commercial banks’ WMPs has fallen to around 3.5% from 5.5% at end-2014, said Shenyin Wanguo Securities last month. And the return from YuEBao, the money-market fund with Rmb826 billion in assets, has slumped to 2.36% from 4% at end-2014.

Minsheng has offered a few overseas alternative products to its private bank clients since last year, including infrastructure, real estate and hedge funds. Its private bank had 15,517 clients and Rmb300 billion under management as of June, according to its interim report. 

Asked about Minsheng’s product selection criteria, Zuo said branding, AUM size and performance track record were key considerations when receiving pitches from foreign asset managers. It has been difficult to convince clients to buy alternative products from new managers without established track records, he noted. 

Moderating expectations 

Another issue is that foreign asset and wealth managers have struggled to meet Chinese investors’ high return expectations, which in November last year were said to be as much as 20% for equities and 10% for fixed income.

But mainland clients are growing more realistic, said Zuo: “I’d say a low-single-digit return can fulfil their expectation now.” He also pointed to the fact that the 400 HNW clients of Minsheng’s Hong Kong branch were happy with the 1.5% annual return they were receiving from fixed-term dollar deposits, he added. 

The findings of an audience poll taken during the panel supported his view: 63% said they were seeking 5% to 7% return on overseas investment, 21% wanted 7% to 9%, but none said they were looking for return over 9%.

Indeed, Minsheng’s clients say they allocate wealth overseas not for chasing returns, but for capital preservation, noted Zuo.

Joanne Murphy, Asia-Pacific managing director of the Charted Alternative Investment Analyst Association, made a similar point. Asian investors’ return expectations are dropping across the region due to the demand for capital preservation, she noted on the same panel. 

“Diversification is the bottom line," added Murphy. "Capital retention is what people are looking for.”

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