In 2020, China eliminated the foreign ownership limit on financial firms, opening the door for foreign fund managers to tap into one of the world’s most populous market of retail investors. Before this, non-Chinese managers could only distribute funds to professional investors.
Rachel Wang, Morningstar’s director for manager research in China, says that establishing a meaningful local presence takes more than regulatory approval, as wrestling market share from the entrenched local players has proven to be extremely challenging.
Why Is It Difficult for Foreign Managers to Establish a Presence in China?
There are multiple reasons why foreign managers have not been as successful as initially envisaged. First, the market is already crowded with 120 local asset managers running public fund businesses. Wang says most of them have established a broad product range, proven track records, and brand familiarity among investors over the past two decades. Secondly, the local players have developed distribution networks and close partnerships with fund distributors, two of the most essential factors to attract fund assets in China.
However, global asset managers bring in their own merits, for example, their disciplined investment approach, global perspective, and risk-management capabilities.
Wang says that many global asset managers stand out with their disciplined and repeatable investment processes and mature risk-management frameworks. This could help them establish a local reputation. She says: “This can benefit fund investors, as a structured investment process can provide a clearer expectation on style and performance. This, in turn, supports the building of well-diversified portfolios, and the greater focus in risk management can lead to better investor outcomes over time.” She also adds that global asset managers would need to better showcase their comparative advantages in order to take share from local asset managers.
Foreign Managers Must Find Talent with the Right Skill and Cultural Fit
The last challenge that Wang identified is an industry-wide talent shortage. Both local and global players have found it difficult to secure local talent, as in this young market, talent is scarce to begin with, even more so as the industry is opening up for more foreign players and both sides target the same pool.
Wang continues: “There can be challenges in replicating the success within their newly established onshore units, as regulations require offshore investment teams to remain separate from their onshore colleagues. In other words, global asset managers need to identify suitable local talents who can help with the successful execution of their investment processes on their onshore products. Given the young and diverse talent pool in China, as well as some investment cultural differences, it can be challenging to find the right cultural fit to execute the global investment processes.”
Wang says with an example: “We have observed that most onshore managers tend to be less experienced and shorter-term-focused than their offshore counterparts, but they can also be nimbler in adapting to market environment changes, which is evident in onshore equity funds’ relatively high average portfolio turnover of 300%-400%.”
Last year, our senior analyst for manager research, Claire Liang, also spoke about China equity funds’ people pillar ratings, after downgrading three funds due primarily to unstable portfolio management teams. While acknowledging that money managers face intense competition for talents, Liang trusts that good parent organizations should be able to continue to attract outstanding investment professionals and retain them.
How’s Blackrock, the First International Entrant, Doing?
Even Blackrock, the first foreign asset manager to have established a local entity and launched retail products for mainland investors, the hurdle is high.
So far, Blackrock distributes a total of four products. According to Wang, the product fleet includes three allocation funds and one ‘fixed income plus’ strategy.
With the products up and running, the question revolves again back to talent. “While we acknowledge that the “fixed income plus” fund, the BlackRock Puyue Fengli One-Year Holding Period Mixed, is helmed by an experienced portfolio manager who joined BlackRock from a medium-size local asset manager with public fund management experience, none of the five named portfolio managers on its four equity-heavy allocation funds have public fund management track records prior to joining BlackRock.”
A competitive environment seems to be a given. Can Blackrock ever enjoy its first-mover advantages? Wang says: “Considering these products are priced and structured similarly to their local peers and that BlackRock has yet to establish its reputation and track record locally, it may take the firm some time to expand its product lineup, introduce differentiated fund products, and build a track record to effectively compete with its local rivals, which enjoy first-mover advantages on these fronts,” concludes Wang.
New Foreign Asset Managers Continue to Get Permission to Set up Shop in China
On Jan. 13, London-headquartered Schroders became the latest to received approval from the China Securities Regulatory Commission to set up a wholly foreign-owned public fund management company in the country. The regulatory permission is regarded as “a key step in[the firm’s overall expansion in the country and reinforces their confidence in continuing to scale up their business and investment presence in China,” ssaid Lieven Debruyne, Global Head of Distribution, Schroders, in a press release.
Wang says: “While it is too early to tell whether global asset managers will be successful in their growth plans in China, the new entrants are likely to bring global best practices to the asset-management industry in China by encouraging a greater focus on adopting a consistent and repeatable investment process and a robust risk-management framework; this can then benefit investors through a greater choice of higher-quality fund products.”
Wang and the rest of the manager research team at Morningstar will continue to closely monitor the rapid industry developments in China with the view to identifying best-in-class funds from the perspective of a fund investor. Regularly, the team publishes the best mutual fund ideas. The latest list comprises 14 funds, with five of them available for sale in Hong Kong via the Mutual Recognition of Funds scheme.
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