Asset and Wealth Management Research Digest€¦ · Management Research Digest False Dawn or Bright...

PwC | AWM Asia Pacific Market Research CentreIssue 2 | 2019

Asset and WealthManagement Research Digest

False Dawn or Bright New Day

As the English theologian Thomas Fuller noted in his 1650 religious travelogue (and the Charlie Daniels Band paraphrased slightly in their 1979 seminal song “The Devil Went Down to Georgia”), the day is darkest just before the dawn.

For long-suffering asset and wealth managers who have operated in China over the years, and in some instances; decades, many could have been forgiven for claiming to see the first signs of the long-promised dawn on the horizon in late 2017.

As the tenants of China’s then-recently announced super-guidance principals were further fleshed out, such cautious optimism may have edged slowly to genuine excitement; the ability for numerous financial institutions and entities, including securities firms and Fund Management Companies (“FMCs”), to take controlling takes in their onshore Sino-foreign joint ventures (“JVs”) being a potential cause of genuine euphoria.

Subsequent updates perhaps dented that optimism. The creation of a new class of competitors through the requirement for Chinese banks to establish their own wealth management arms certainly cannot have been well received by foreign asset and wealth managers. Recently, it has been announced that under reforms to the Qualified Foreign Institutional Investor (“QFII”) and Renminbi QFII (“RQFII”) schemes, Private Fund Manager Wholly Foreign Owned Enterprises (“PFM WFOEs”) may have their products seeded from offshore investors using the QFII and RQFII cross-border programmes. This development could see PFM WFOEs, which after a period of three years and subject to meeting certain criteria stand to receive a public fund licence and compete against FMCs, afforded a way of gaining a track-record in China to assist them in marketing funds to HNWIs, institutional investors and mass-retail investors; all groups that FMCs currently serve.

As China’s ‘Super-Guidance’ and other regulations develop, the future of the FMC public mutual fund landscape is likely to alter significantly. Foreign asset and wealth managers with existing stakes in FMC JVs, or those looking to take a stake in an FMC, will need to be aware of how to seize these emerging opportunities and how to navigate the threats.

2 Asset and Wealth Management Research Digest

Asset and Wealth Management Research Digest 3

Latest industry data, valid as of December 2018, shows FMC public mutual fund AUM (“core AUM”) at RMB 13.03tr, an increase of RMB 1.43tr since the start of 2018. Compared against China’s other securities products, core AUM ranks 2nd across China’s total securities AUM sectors as of 3Q18, though we expect this trend to have continued in 4Q18.

Core AUM has staged a relative comeback since appearing like it would be overtaken by private fund AUM (AUM held among China’s 25,000 private fund managers, including PFM WFOEs) as recently as mid-2018, where the gap was circa RMB 100million before market forces saw core-AUM widen its lead.

China’s core AUM is not evenly distributed among industry players. Of the China’s 120 FMCs, 44 are JVs and the remainder are 100% domestically owned by Chinese entities, though several of these domestic entities will be joint ventures between Chinese entities. Collectively, the top 10 FMCs amount for over 50% of core AUM. Encouragingly for foreign asset and wealth managers, there are five FMC JVs in the top 10 which have combined market share of circa 20%.

While these FMC JVs generally have large Chinese banks as their domestic partner, it should be an encouragement to existing and potential foreign players and demonstrate that foreign firms are able to effectively engage in China’s inwardly focussed public mutual fund space.

This state of affairs is unlikely to last.

Several developments, starting from the ‘Super-Guidance’ regulations issued in November 2017, have laid the foundations for radical change across the public and private fund industry in China which could significantly alter the composition of industry players and the amount of core AUM they manage.

Current FMC landscape

60

50

40

30

20

10

-

Futures Company

Legends

FMC SA and Subsidiary

Private Funds

Public Funds

Securities Management Companies

Dec-17 Mar-18 Jun-18 Sep-18

16.88 16.46 15.28 14.18

11.60 12.37 12.70 13.36

11.10 12.04 12.60 12.80

13.74 13.08 12.33 11.72

0.25 0.19 0.16 0.17

Chart 1: Securities Products Composition, 4Q17-3Q18

Sources: AIFC, AMAC


Chinese Banks WMP arms

The development that potentially stands to have the greatest impact on the competitive landscape of the asset and wealth management industry in China, as well as on FMCs, is the requirement for Chinese banks who wish to distribute wealth management products to do so through their own wealth management arms.

Public Fund AUM Private Fund AUM

Chart 2: Public v Private Fund AUM, January 2016-November 2018

Current FMC landscape February 2019

15

14

13

12

11

10

9

8Jan 17

Jan 18

Feb 17

Feb 18

Mar 17

Mar 18

Apr 17

Apr 18

Jun 17

Jun 18

Jul 17

Jul 18

Aug 17

Aug 18

Sep 17

Sep 18

Oct 17

Oct 18

Nov 17

Nov 18

Dec 17

These developments include:

• Domestic Chinese banks being required to establish their own WMP arms;

• Recent changes to the QFII and RQFII cross-border investment programmes;

• Increased activity among PFM and Qualified Domestic Limited Partner (“QDLP”) WFOEs; and

• Foreign asset and wealth managers taking a controlling stake in an onshore FMC.

These developments, and their potential impact on the operations of existing FMCs, are further expanded on below.

Sources: AIFC, AMAC

Private fund AUM edged ahead of public fund AUM in January 2017, it would not be until June 2018 when they threatened to do so again, coming within RMB100million of each other before widening significantly.

Prior to this change, Chinese banks engaged in the channelling business to keep their BWMPs off their balance sheets. This arrangement, while profitable to the banks, shares some responsibility in the ballooning of China’s shadow-banking sector. FMCs could also distribute their products through the banks which, until the last couple of years, accounted for the overwhelming majority of product distribution.

Legends


The new rules stipulate Chinese banks need to establish their own wealth management arms, which, as of January 2019, over 20 have done so with capitalisation appearing to range from RMB 1bn for city or provincial level banks, to RMB 5bn for joint-stock commercial banks, up to RMB 16bn for the larger state-backed banks.

How banks who already have FMC JVs with foreign asset and wealth managers will treat their two nominally competing operations remains to be seen. Already, and in conjunction with announced changes allowing foreign shareholders in FMC JVs to take a controlling stake, there has been a public rebuff of a foreign asset manager offering to take a majority stake from its domestic Chinese bank partner which has received approval to establish its own wealth management arm.

While the FMC JV in question is within the top 10 FMCs, the indication that a minority, majority, or all Chinese banks will keep both their stakes in FMC JVs despite a regulatory requirement to establish their own wealth management arms could make for some interesting competitive developments in the market as the banks’ wealth management arms get more established and capable.


Some industry commentary believes that this development poses an imminent threat to FMCs, especially those with a large fixed-income product suite, as these are expected to bear the initial brunt of the new BWMP onslaught. FMC bond funds may suffer as the wealth management units of banks are allowed to invest in non-standard assets, which have lower liquidity and higher yields, whereas FMCs may not.

If this eventuates, FMCs would be most competitive in mixed, equity and multi-asset products which banks, generally, do not have much experience in and may seek to outsource. In which case, FMCs that have a Chinese bank as a domestic shareholder may have management of these products outsourced to them from the banks’ wealth management arm.



Chart 3: FMC Fund AUM and Numbers, 4Q18

QFII / RQFII Changes

Earlier in 2019, China’s CSRC invited the industry to comment on proposed changes to the QFII and RQFII cross-border investment programmes. The proposed changes broad objective is to promote high-quality opening of China’s capital markets and introduce more long-term overseas capital according to a statement from CSRC. To fulfil these goals, the proposed changes seek to combine the two programmes, increase the ease of applying for market access via the to-be-merged programme and broaden the investment scope allowed.

In terms of making it easier for foreign asset and wealth managers to apply for QFII and RQFII quota, the proposed changes should benefit FMC JVs as they can take a multi-pronged approach to growing the amount of foreign assets they manage. This includes, leveraging their offshore relationships with new quota holders to invest in existing onshore funds, increasing the quota held by the foreign asset and wealth manager and offering a greater range of products.

Alternative Investment Funds

International (QDII) Funds

Equity Funds

Mixed Funds

MMFs

Bond Funds

Legends

Sources: AIFC, Wind

Initially, the newly formed bank wealth management arms could launch products which would compete with bond and other fixed-income FMC products as they bear most resemblance to bank wealth management products and the banks are likely to have more experience in these sorts of investments than others, at least initially.

As they grow in confidence and experience, the bank wealth management units may expand their offerings into equities and multi-asset solutions, adding more competitive pressure to FMCs in the public mutual fund space.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Number of Funds Fund AUM

These changes, if enacted as currently proposed, could provide a significant boost to the various PFM WFOEs currently existing in China and give an additional incentive to foreign asset and wealth managers who currently do not have an onshore PFM WFOE presence to get one. The main benefit to PFM WFOEs is the ability to use the QFII and RQFII quota to invest in their private funds as they currently cannot use the WFOE’s capital to do so. The proposed regulations only allow for private funds whose underlying assets fall within the permitted scope of the QFII and RQFII scheme but as the majority of current private funds launched by PFM WFOE’s to date fall into this category, this is unlikely to be detrimental.

While FMCs also stand to benefit from increased foreign capital inflows to China in the short-to-medium term, in the long-run the ability for foreign asset and wealth managers to seed their onshore private funds combined with the, expected, receiving of a public fund license after three years may see momentum swing towards a WFOE presence over an FMC, whether a JV or with 100% control.



Bond Funds

PFM WFOEs

In addition to the expanded QFII and RQFII scope outlined above, the first batch of PFM WFOEs are nearing the stage in their operational life where they could, theoretically, apply for a public fund licence. Several Chinese private fund managers have reportedly already taken this step and numerous PFM WFOEs should be in a position to do so presently, providing they meet other requirements which the proposed QFII and RQFII changes should assist with.

PFM WFOEs are also able to have a QDLP WFOE as a subsidiary, enabling foreign asset and wealth managers with a PFM WFOE to expand their product offerings to include offshore investments targeted at domestic Chinese investors should they receive QDLP quota. This arrangement does not extend in the reverse, i.e. QDLP WFOEs currently cannot establish a PFM WFOE subsidiary and dual-purpose or ‘double-hatted’ WFOEs stand to grow in popularity among asset and wealth managers who are able to provide onshore and offshore investment capabilities and products.

Foreign Asset and Wealth Managers Taking Controlling Stakes in Onshore FMCs

Another perceived benefit to come out of the super-guidance is the ability for foreign investors across a range of financial JVs, including securities firms and FMCs, to take majority stakes and, in the coming years, 100% control.

On the securities firm side of things there has been strong initial action with several foreign parties in JVs expressing interest in taking controlling stakes and Chinese regulators authorising them to do so.

On the FMC side, matters have been more subdued.There has been the afore mentioned public rebuffing of one foreign asset manager who broached the possibility of taking a controlling stake of its large, Chinese bank JV partner, though the foreign asset manager in question is broaching the possibility of taking controlling stakes in other FMCs, and two major foreign asset and wealth managers have revealed their intentions in buying out their domestic counterparts. Additionally, market chatter indicates other foreign players are making good headway in talks with some interested parties.

We believe that the FMC market will segment on the topic of majority control. Chinese parties who are in the top 10-15 FMCs are unlikely to sell no matter how large the monetary incentive to do so.

This is due to the financial success of the FMCs they control and also partly due to Communist Party concerns that foreign-controlled FMCs may not adhere to party principles regarding the role of FMCs in their plans for China.



At the other end of the scale, the bottom 60 FMCs collectively account for under 4% market share, industry sources report they are receiving numerous calls from Chinese parties looking to offload a controlling stake in their FMCs. A controlling stake in these FMCs is likely to come cheap(er) but will likely require more resources to grow to a profitable venture.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Chart 4: FMC Market Share Split, 4Q18

Top Firms Middle Ground Bottom Half

With half of China’s FMCs accounting for just over 4% of market share by AUM, with a handful being FMC JVs, foreign asset managers searching for bargains could find some in this pile. These FMCs are likely to require substantial resources and a clear strategy in terms of their value proposition to the foreign asset manager but some diamonds could be found.

The middle-ground contains a range of FMCs, some of which are JVs, of varying market share and profitability. Deals struck between foreign asset managers and Chinese counterparts are likely to reflect a true market value of the FMC. We are aware of some foreign asset managers willing to divest their stake because China is not a priority market for them, but only for the right price.

China’s top 15 FMCs control slightly over 60% of the market share as measured by AUM, with just over 1/3rd of these being FMC JVs. Given the market share and profitability of these FMCs, it is unlikely the Chinese partners would sell a controlling stake. Already, one high-profile foreign asset manager has been rebuffed from purchasing a controlling stake in its FMC JV by its Chinese partner.

Sources: AIFC, Wind

The middle-ground is where we see the greatest potential. FMCs ranked 20-60, which include many JVs, are established enough that they are a viable business without too much additional investment and, for the right price, domestic shareholders could be convinced to hand over a few percentage points of control. Choosing the right party to approach for a controlling stake will be crucial should a foreign asset manager want to pursue this option and knowing how the targeted FMC performs in the market and against its peer-group will help in target selection.

Legends


China’s mutual fund industry has, despite hiccups in 2008 and 2015, had significant growth over the years and stands poised to continue to expand. This growth has been shared across domestically-owned FMCs and FMC JVs and many FMCs provide strong profits for their foreign and domestic shareholders alike.

While recent regulatory announcements and changes may threaten the industry in the short-term, over the longer period they may prove a benefit in allowing the industry to concentrate its attentions on a more focussed array of areas.

For example, if the bank wealth management arms come to dominate the fixed-income space, FMCs can focus more on equity and multi-asset products. This may also provide a powerful incentive for FMCs to change their distribution model which is still heavily reliant on banks to distribute their products. Building their own distribution capabilities and partnering with more mobile and online third-party distributors could help FMCs lower product distribution fees and expand their potential investor reach.

If PFM WFOE’s come to absorb QFII and RQFII investments, FMCs can target domestic HNWIs and institutional investors through their non-core operations like segregated accounts.

Many FMCs operate FMC subsidiaries which offer wealth management products to HNWIs and retrenching from this risky but lucrative product pool could enable FMCs to further concentrate on their core business.

While PFM WFOEs and other private fund providers may receive public fund licenses, they may still lack the brand recognition that many FMCs possess and the HNWI investors who invest into private funds may not want to be associated with private fund managers that also target mass-retail investors.

Opportunities and challenges


China’s mutual fund industry has progressed significantly since its inception and while it has some ways to go before it reaches the level of development seen in the US mutual fund market, regulatory reforms and increasing investor demands should see its development continue.

Opportunities exist for foreign asset and wealth managers to expand their existing FMC presence in the market or enter the FMC space with either a majority or minority stake. Others may wait and assess how the industry adapts to the changing dynamics before deciding on their course of action.

Regardless, the emerging challenges and opportunities will be seized on and successfully navigated by firms who have the right strategy, resources and commitment to the market. As the day dawns, a brave new world could emerge for those with the wherewithal to pursue it.

Looking ahead


You want to…

• Take a minority or majority stake in an existing Chinese FMC

• Gain detailed understanding of a specific group of entities operating in China’s asset and wealth management space

• Seek an independent party to provide market intelligence on internal and external pressures facing your FMC in China

We can help you with…

• Comprehensive China FMC benchmarking and peer assessment, where we work with you to identify an industry peer-group and benchmark the performance of your FMC against this group

• Customised SWOT analysis examining regulatory developments, market trends, existing and emerging competitors and how your FMC can best navigate the challenges faced, and seize the opportunities on offer

The potential of China’s asset and wealth management industry has been a strong lure over the years for a myriad of market players and foreign entities.

If you are operating in China or looking to make your first foray into the lucrative market the Middle Kingdom offers, it’s important to make sure your decisions are based on objective data analysis coupled with deep industry insights. Here’s where we come in.


We can help you look ahead with confidence and seize the opportunities on offer in China’s immense asset and wealth management industry.

FMC Benchmarking and Peer Assessment

Contacts

Armin ChokseyPartner, Asian Investment Fund Centre & Market Research Centre LeaderPwC Singapore+65 6236 4648 [email protected]

© 2019 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.

Look out for our next issue of AWM Market Research digest to be released end-March 2019. Subscribe to our future research digests at our website here https://bit.ly/2s4hijH

Conal McMahonSenior Manager, Market Research CentrePwC Singapore+65 9678 [email protected]

Asset and Wealth Management Research Digest€¦ · Management Research Digest False Dawn or Bright...

Documents

Transcript of Asset and Wealth Management Research Digest€¦ · Management Research Digest False Dawn or Bright...