It is time for foreign fund managers in China to experiment with solutions fit for 2019. It’s time to go digital in distribution.
China’s $2 trillion mutual-funds market is tantalizing foreign fund managers, which now have more flexibility in how they manage their businesses onshore. Laws have changed to allow them to have majority (but not complete) ownership of mutual-fund joint ventures.
Meanwhile in Shanghai, leading global firms such as Fidelity, Man, UBS and Value Partners have one or more WOFEs or “woofies”, wholly owned foreign enterprises. These limited-liability companies allow foreigners to run their businesses as they like, including raising capital to invest offshore, within certain limits – but without the access to onshore distribution that J.V.s bring.
This means fund raising via banks, which dominate wholesale channels, is doable but a hard slog.
China is uniquely challenging in other ways. Top domestic fund managers pay better for top talent, have long track records, benefit from longstanding relationships with brokers or regulators, and their salespeople are comfortable communicating with customers via WeChat. Foreign firms struggle with all of the above.
The ubiquity of smartphones means younger people won’t purchase mutual funds from banks because they’re avoiding branches. There are now even new online distributors targeting institutional investors, says Sandra Lu, partner at LLinks Law Offices in Shanghai.
Sticking to the familiar playbook may not be enough for foreign asset managers. Fortunately, they have channel options in China that don’t exist elsewhere, including the platforms of internet giants such as Ant Financial and Tencent’s WeChat, and third-party online wealth-management platforms run by fintech players such as CreditEase and Lufax.
“China is different,” said King Au, CEO at Hong Kong-based Value Partners, speaking at Fund Forum Asia, an asset management conference. Government identity databases make KYC a non-issue, and also eliminates the practice of nominees (every fund subscription is registered under the end investor’s name). And everyone is connected via mobile devices.
“This has enabled fintech to develop quickly,” Au said, adding that digital platforms hosted by ecommerce companies, messaging companies or online sellers can give manufacturers fast, unprecedented access to customers.
Foreigners are trying to figure out if going direct to consumers – which they don’t do anywhere in Asia – is viable in China.
“We notice that many [domestic] mutual fund companies have their own direct online distribution,” said Aileen Song, Shanghai-based managing director for China at Alliance Bernstein, speaking at the same conference. The firm is considering working with online distributors or do its own direct offering for retail investors.
Online is no magic bullet. It opens new risks, such as cybersecurity, and new challenges, like understanding the algorithms beneath the hoods of robo advisors. Indeed, these services are rudimentary, usually packing simplistic client profiles into ETF portfolios or money-market funds. Worse for active fund houses, most online platforms seem to direct assets into money-market funds, which in China now total $1.1 trillion, or 55% of the total funds industry, according to UBS.
But robos are getting better, as firms adopt artificial-intelligence driven solutions that can enable more personalized advice. The prospect of mass customization of portfolios is imminent.
Moreover, fund managers face challenges in growing revenues, in Asia and around the world, due to competition from passive products, falling fees, and changing consumer demands. In Asia, industry executives have looked at cross-border passporting or no-load products as potential solutions, but these are unlikely to yield results any time soon. Digital distribution looks to be the only potential game-changer.
Asset managers, like most financial institutions, have lost their contact with end users. They have yet to grasp the potential of big data and A.I. to engage with customers and design better products for them. None are prepared for the day when one-size-fits-all products stop working.
This is as true for fund managers in China as it is anywhere, but their domestic competitors are already stealing a march. Direct-to-consumer might not work today in conventional markets such as Hong Kong and Singapore, and maybe the tech or the governance in China isn’t mature enough either.
But if fund houses don’t want to be Amazoned in their home markets, why not begin to practice in China – the world’s most sophisticated fintech marketplace?