Institutional Investor, April 2009

China’s asset management industry took a severe beating in 2008. In that respect, it’s no different from the rest of the world. But unlike most global markets, China’s has started 2009 with a bang.

According to data from analysts Z-Ben Advisors in Shanghai, the fund management industry fell dramatically, by 40%, in total assets in 2008, from RMB3.2 trillion at the beginning to Rp1.94 trillion at the end. But there are several important contexts to that decline. One is that, unlike many other markets, a decline on that scale merely took the industry back towards the levels it was at in early 2007: so it erased a year of good returns, rather than a decade as is the case in many developed markets.

Another is that early data for 2009 shows a strong improvement. By February 28, according to Z-Ben, assets had reached RMB2.03 trillion, up 4.7% over the previous quarter, underpinned by the fact that China’s stock markets are unusual in world terms for having climbed in the year to date (the CBN 600 index was up 23.5% at the time of writing).

And finally, while the performance of markets obviously didn’t help the size of the industry in 2008, there was surprisingly little outflow. “Redemptions were far better than we expected,” says Howhow Zhang, an analyst at Z-Ben. “It was five to 10 per cent at worst of equity-oriented products. And the outflows were offset by inflows into fixed income product.”

Does this reflect a growing maturity among not only the asset management industry in China but the investors who participate in it? In recent years, while the rates of growth in the industry have been remarkable (the industry was worth RMB856 billion in 2006 so has still more than doubled despite last year’s declines, and even that 2006 figure was a tenfold increase from the start of the decade), investor fickleness has been a cause for concern, with huge flows from product to product and from asset class to asset class according to the relative attraction of equity or money market products. That track record would normally have been expected to result in much bigger outflows from fund managers, and in particular from equity product.

In fact, the industry seems to have taken advantage of the crisis to build in sophistication. Rather than hide, more than 100 new products were launched, the majority of them bond funds, filling what was previously a clear gap in the market. “The regulators have pushed the industry towards fixed income products,” Zhang says.

For those in the industry, 2008 was alarming but the bigger names appear unruffled. “It was a very tough year for the whole industry,” says Li Quan, deputy CEO of Bosera Asset Management in Shenzhen. “But business is stable here.” Bosera had RMB161.1 billion under management as of December 31, RMB125.7 billion of it in mutual funds; it boasts 10 million individual account holders.

Numbers like that reflect why there is so much interest in Chinese fund management, both among the domestic institutions and the many multinationals that seek to build joint ventures there. For one fund manager – and not even the biggest one – to have 10 million domestic investors in its products at the end of the worst stock market performance in living memory gives some indication of the industry’s potential. All told, 130 million Chinese people hold shares, yet that is still barely a 10% level of penetration nationally. When the economy recovers and individual wealth resumes its growth, fund managers will have a tremendously powerful demographic shift underpinning their businesses.

While mutual funds are the most obvious part of the story, leading fund managers have also been quick to try to build a strong institutional presence too. Apart from being lucrative and showing great potential, this is also much more predictable money to manage. “Institutional clients are more sophisticated and their demand for earnings is reasonable. That’s a good thing,” says Hua Ran, senior portfolio manager and general manager for the institutional investor department at E Fund Management in Guangzhou. “For institutional investors the time horizon is much longer than for retail.

“But they also are very good at looking at our portfolios, asking us to explain why we are doing this or not doing that. It is much more interactive than with retail investors.”

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