For an industry that came into existence only 20 years ago in China, it has reached remarkable heights. Over the last two decades, China’s fund management firms have achieved unrivaled growth in both size and maturity – growing their AUM from RMB10.4 billion (US$1.27 billion) in 1998 to RMB12.6 trillion (US$2.0 trillion).We see this trend gaining further momentum, with KPMG China forecasting total AUM to hit RMB36.3 trillion (US$5.6 trillion) by 2025, which would make it the second-largest asset management market in the world.
In China, only ten Fund Management Companies (FMC’s) control 51.3 percent of the country’s market share. These companies have been the primary beneficiaries of the industry’s explosive growth in recent years.
However, their dominant status will be shaken as these players will be met with new forms of competition bringing new product and service offerings. Domestic incumbents will also face international competition as appetite from new asset managers heightens. Additionally, competition will not only come from the financial sector, but also from China’s home grown tech giants with strong distribution channels, large amounts of capital and innovative business models.
Banks, insurers and tech companies will all be competing alongside FMCs for assets to manage. We believe increased diversity is a good development as it will stimulate innovation, but it will also mean that everyone will be required to work harder to capture a meaningful share of the growing pool of assets.
Retail have played an important, albeit changing, role in China’s asset management industry. They were the dominant segment of the market up until 2007, when volatility in stocks prompted individual investors to seek less risky assets.
Interestingly, in 2014 Tianhong FMC, backed by Alibaba launched Yuebao — a FinTech platform that has quickly grown into the world’s largest money market fund. The success clearly demonstrates the growing importance of technology as a distribution channel.
Further, the demand for global allocation and multi-asset strategies are bringing retail investors back into the market. However, asset managers need to be aware of the potential challenges. Brand building can take a long time – only when the FMCs have reached scale will they be able to make a profit.
Institutional investors and high net worth individuals are two segments that are growing within China.
The growth of investable assets held by institutions can be explained by a variety of factors. In the public sector, the National Social Security Fund is a notable pool of capital that is delegating to third-party managers. The private sector contribution comes from enterprise annuities, while the existence of cross-border investment channels means that more institutional money can come from overseas.
Abundance of capital is not the only story, managers and security companies have worked hard to seize emerging opportunities by taking advantage of regulatory developments that expanded their business scope and by creating innovative products that cater to institutional needs.
The institutional business remains more profitable in relation to the retail, but it requires greater customization, flexibility and agility. To continue on the growth trajectory, FMCs will need to optimize or even redesign customer strategies and transform their middle and back office.
As evident by the success of Yuebao, we believe that there is huge potential for technology to improve the industry’s ecosystem. But we also think that the future role of echnology is often overstated when people say that new online channels will disrupt traditional channels out of existence.
Online sales channels only work effectively with simple investment products — such as money market funds. Sophisticated products require a level of sales and after-sales support that an online channel might not be able to provide. What is likely to happen is that some of the start-up Fintechs will be acquired and absorbed into larger
Given the dominance of the banking industry, asset managers will remain dependent on banks to sell their products. To lessen their dependability on banks, asset managers may want to consider independent financial channels and/or engage in strategic partnerships with banks. The range of products that China’s asset managers can sell has come a long way from the closed-end funds. The biggest developments have been the introduction of exchange traded funds (ETFs), fixed income funds, and funds that provide offshore exposure. Going forward, these products offer the greatest potential for the industry, though asset managers will need to develop a strategic vision to ensure new products meet consumer needs.
With exponential industry growth, the availability of human capital in China’s asset management market has failed to keep up. The shortage of experienced fund managers is compounded by low retention rates due to short-term evaluation methods, further hindering the range of available products in the market. How the industry deals with the talent shortage will be of crucial importance over the coming years.
In 2017, China relaxed its restrictions on foreign ownership; foreign companies can now own up to 51 percent of a company, up from 49 percent.
While foreign companies are nothing new in China’s asset management industry, asset managers are no longer looking for capabilities from their partner, but more market access and client resources — factors that will become increasingly important as the cross-border business develops.
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