Which Sino-foreign fund JVs have succeeded?

Z-Ben Advisors assesses which fund joint ventures in China are truly competitive, and which ones are at the bottom of the heap.

It has been six years this month since the first Sino-foreign fund management joint ventures were established, and there are now 32 of them. Quickly changing trends, business models and regulatory openings have also affected perceptions of which businesses are doing well, and which are not.

Shanghai-based consultancy Z-Ben Advisors has created a ranking of all 32 JVs based on 20 factors to determine a more long-term view about success for Sino-foreign fund JVs.

"The goal for the report is to smooth out, but be reflective of, any historic single-year gains achieved by specific managers," says Peter Alexander, principal at Z-Ben. "Following this methodology should provide the best assessment of the JV segment and each firm's ranking, year in and year out."

Based on the 20 factors, Z-Ben ranks Harvest Fund Management, in which Deutsche Asset Management has a stake, as the most successful firm. Full Goal Fund Management commands a strong second place.

The ranking scores bunch up for the next dozen or so names, but Z-Ben rates Penghua Fund Management, ICBC Credit Suisse and Fortune SGAM as the third, fourth and fifth most successful JV firms.

Bank of Communications Schroders, China International, UBS SDIC, Rongtong and CCB Principal round out the top 10.

Among the factors quantified by Z-Ben are things such as fund performance in different asset classes, asset retention, product innovation, client mix, portfolio range, portfolio manager turnover and distribution.

Z-Ben shared its analysis of market share and fee extraction to give a flavour of its methodology.

At first glance, market share is straightforward: Harvest has the biggest market share among the 32 JVs and is also the largest: 6.32% of the market in 2007, a growth rate of 0.77% in 2008, and total AUM of Rmb137.51 billion ($20.2 billion). At the bottom is Axa-SPDB, a new JV that only debuted a product last year. ICBC Credit Suisse was last year's top gainer, with 2.10% bigger market share in 2008, thanks to its parent, ICBC, and its decision to aggressively push money-market funds. Invesco Great Wall lost the most market share because of its reliance upon equity funds.

However, Z-Ben also ran the same numbers but stripped out new product launches and money-market funds, to see which core products were able to best weather the storm. Harvest still comes out on top, with 5.72% of the market, or Rmb75 billion, although its year-on-year market share fell. The biggest pick-up in market share in 2008 was won by Full Goal, which gained 0.47%. Dependence upon bank parents selling money-market funds pushed ICBC CS and CCB Principal into middling territory.

An analysis of fee extraction shows that the ability for foreign owners to earn revenues has declined more than expected. Z-Ben calculates that at the start of 2008, on average foreign partners gained 142 basis points of fees per unit of assets under management, but now extract only 123bps.

There were, however, two exceptions: KBC Goldstate and AIG Huatai, in which the foreign investors actually increased fee revenues, thanks to being able to introduce a new equity fund in 2008. But most leading JVs, including Bank of Communications Schroders, Fortis Haitong and ICBC CS, sold low-fee bond products, and for these foreign owners, fee extraction fell around 40% year-on-year.

Overall, Z-Ben expects those firms with a strong equity product base can do better in 2009. The A-share equity market is up over 30% year-to-date, which should help both top-line revenue and foreigners' fee extraction capability. Players such as Invesco Great Wall and Rongtong should benefit, while those overly reliant on money-market funds, including Fortis Haitong and ICBC CS, may come under pressure if fund investors redeem.

Z-Ben's Alexander says the full report should allow fund executives to get a precise tool to understand both their own and their competitors' strengths and weaknesses. He says this is more important than the rankings, which necessarily reflect Z-Ben's own biases in how it weights the various factors.

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