Funds industry frets over digital distributors in China
Tianhong and China Merchants Bank show the power of digital technology and distribution beyond best-performing products.
After watching passive products eat their lunch, active fund-management industry executives are wondering if Chinese fintechs might do the same, only this time in the guise of distributors or wealth-management providers – particularly if they use their market power to compete directly with fund-management companies.
Conversations at Fund Forum, a conference held annually in Asia, revealed confusion and no clear action plan among fund chiefs.
The first blow to traditional fund managers was delivered by Tianhong Asset Management. Its money-market fund, Yu’e Bao, used mobile technology to direct consumers’ leftover change into a product that could beat cash returns. Tianhong shot from obscurity to become China’s largest fund manager, with over $120 billion of assets under management.
That success had nothing to do with relationship managers or brand. Zheng Yudong, CEO of Xuanji, the robo arm of Beijing-based Pintec Group, a digital consumer-lending business, says distribution for the middle class and mass retail segments will be increasingly online.
He reckons the middle tier of the Rmb100 trillion market for investment products in China accounts for 40%, and mass retail another 10% of that figure.
Although rich people will insist on talking to humans (particularly as most of them are first-generation wealth creators), he says other investors have already been captured by wealth-management providers offering either trust products yielding 4% to 5% per annum, or by Yu’e Bao.
“The next change will be as fintechs enter, in order to standardize service and distribute product to this market,” Zheng said.
He cited China Merchants Bank, which in December launched a robo-advisor of its own. It has already raised Rmb3 billion and continues to attract assets. He believes this success will be good news for companies such as Xuanji and Micai, as other banks will now want to jump on the bandwagon.
New winners who probably aren’t you
But it may not be the startups that reap the biggest rewards, Zheng adds. “Companies with huge distribution power will have the advantage,” meaning either big banks, or anyone with huge consumer bases: messaging apps such as WeChat, or handphone sellers like Xiaomi, or companies selling travel services.
“These companies interact with clients daily and they are now crossing into financial markets,” Zheng said.
Today retail investors buy themey, hot products, which has enabled manufacturers with the right fund or lucky timing to do well. Such opportunities may become harder to come by.
Greg Van der Bergh, Beijing-based CEO at Micai, which bills itself as the first robo-advisor built in China, says influence will shift even more to those players able to create a marketplace. He argues that fund performance is harder to differentiate, margins are falling (especially with ETFs in the mix), and clients are likely to start to want a more wealth-management, holistic approach, rather than be pitched the latest shoot-the-lights-out fund.
Hope for some traditional managers?
There is also uncertainty about whether powerful distributors will want to muscle in on manufacturing, too. On this point Zheng isn’t sure, noting that a dud performer can damage a wealth manager’s reputation, so why bother risking manufacturing products? It’s easier to continue working with professional asset-management companies.
Belle Liang, head of investment advisory at Hang Seng Bank in Hong Kong, also argues fund managers still have scope to do well in China. Falling yields in property, slowing economic growth and an opening capital market (with various securities channels in and out of Hong Kong and a more accessible interbank bond market) suggest there will be demand for new products including international exposures.
Liang says Yu’e Bao, a simple money-market fund, shouldn’t be equated with more complex products. Multi-asset, structured and international products require more than three minutes on the handset to make a proper decision, she says.
“People spend only three minutes a day on their finance app,” she said, “but lots of time on their stock-related apps [to speculate]. To use a financial app to create sticky customers by giving them meaningful advice – that has a long way to go.”
Moreover, of the Rmb100 trillion in invested wealth, more than 60% is in fixed-return products, where yields are in decline.
But whether a manufacturer or a distributor/wealth manager is to dominate requires building brand, says Blair Pickerell, a veteran of the Greater China funds industry who wore the hat of strategic advisor to CreditEase Wealth Management.
“But there is a lack of trust, particularly for banks,” he said. “Who builds trust, wins. And those who get strong distribution will compete with fund managers…if [a wealth management platform] is making half the margin on distribution, why let the other half go?”
He reckons short-term gains for fund managers with high-performing products will not last long, unless manufacturers find a way to change this dynamic.
Van der Bergh is also skeptical that big digital players will leave money on the table. “Many firms like Alibaba and Baidu have market data. They can predict what will happen better than the consumers they serve. They can create funds themselves that can outperform traditional funds, because they have better data…their vision is to leverage data” and so these companies will either wade directly into manufacturing, or set up affiliates to do so.