Mutual funds lie at the heart of many of China’s current wealth management solutions. The principal architects of these products are fund management companies and, although there is some direct distribution, banks are believed to be the point of sale for around three quarters of all mutual funds.
The emergence of more sophisticated wealth management products gives banks the opportunity to challenge the fund houses’ dominance in the field of asset management. But the banks have a lot of ground to make up.
“Their asset management bears no comparison to us,” said Lei Yong, who heads the Qualified Domestic Institutional Investor (QDII) fund at Fortune SGAM Fund Management, a joint venture that includes Société Générale.
As China’s stock markets continued to struggle in the second quarter of 2008, assets controlled by the country’s fund managers fell 20.1% to US$290 billion, according to Z-Ben Advisors, a fund management consultancy. Investors were busy moving their money back into bank accounts, while those that stayed in the market increasingly turned to bond funds.
But the changing market environment has made little impact on the fund house rankings. Z-Ben has found that an ever-greater share of industry assets is falling into the hands of the top 10 companies, none of which are joint ventures involving Chinese banks. In terms of distribution, local lenders have even been known to give precedence to popular fund management company products over their own joint ventures’ offerings.
“It’s true our joint venture products are being distributed by all of China Construction Bank’s (CCB) branches, but they distribute other people’s products too,” said Rex Auyeung, Asia CEO of Principal International, which runs a fund management joint venture with CCB. “I would like to think that carrying the CCB brand would give us a solid advantage, but I can’t confirm that. They look at [CCB-Principal] just like they do everyone else.”
While banks are likely to improve their in-house offerings and combine them with other wealth management services, this doesn’t necessarily mean the fund houses will lose market share. For a start, their target market is slightly different from that of the wealth managers: The minimum buy-in for a wealth management product is around US$1,500 – 10 times the typical entry level for a mutual fund.
“It’s like selling Rolls Royces and VW Santanas,” explained Min Tha Gyaw, a research associate at fund management consultancy Z-Ben Advisors. “You sell 10 Rolls Royces and that’s extremely profitable for you. Sell 4,000-5,000 VW Santanas and you will also make a decent sum of money.”
Min believes fund management companies’ mass market appeal will stand them in good stead. He notes that fund managers are now opening up new channels through which to reach investors directly, while brokerages and independent wealth managers are also trying to get in on the act.
At the same time, fund houses are being allowed to enter new areas of wealth management. According to Fortune SGAM’s Lei, this will soon include dedicated account management for super-rich families or companies. The minimum permitted investment is just over US$7 million, with the fund house taking a small commission as well as a cut of the profits.
“It is more like the hedge fund business, and the investment scope is much broader,” Lei said.