66% of foreign invested fund management companies in China anticipate significant growth by 2012

SINGAPORE, 28 April 2009 – Despite the Global Financial Crisis there is a renewed sense of optimism among the foreign fund management companies in China, according to the 2nd PricewaterhouseCoopers survey entitled “Foreign fund management Companies in China 2009”. Although the participants forecast flat to moderate revenue growth in 2009, they envisage significant pick-up over the next three years. By 2012, 66% of respondents anticipate that they will have significant growth of between 21% and 100% per annum. This is evidenced in the survey by similar projections of growth in Assets under Management by 2012 and by estimates of an increase in the numbers of retail investors in funds, growing from 33.8 million currently to almost 69 million by 2012.

Almost half the participants expressed the “maximum” level of commitment to the Chinese funds market. Furthermore the report found that the foreign partners’ strong support and belief in future potential was closely supported by their domestic partners. This suggests that despite the global financial crisis there has been no change in the foreign commitment to China. However, some believe that there are a number of world class management companies not present in China because of the joint venture minority ownership requirement.

Seventy-nine percent of participants do not believe that the market is over-supplied with foreign fund management companies and predict a continual stream of new entrants. In addition to the 33 currently active companies, another seven new entrants are being set up. Six participants predict that the number of joint venture companies could exceed 50 by 2012. This number will surpass the domestic fund managers who are expected to total to around 40. The foreign fund management companies also anticipate a growth in the current market share for assets under management of around 45%.

The respondents see a range of future opportunities spanning QDII, segregated accounts, capital guaranteed funds, balanced funds, equity funds, private equity funds, real estate funds and the development of new lines in the pension sector and investment advisory services.

In the 2007 report one of the major opportunities identified by the participants was QDII. Foreign fund managers were then poised to capitalise on the outflow of funds that would result. With hindsight, the timing of the approval of QDII funds proved to be unfortunate and many investors suffered with the subsequent slide in global equity markets. Two years later, although the participants acknowledge the damaging experience of QDII investors, they predict that QDII once again represents a significant opportunity.

“Conceptually the QDII product is sound and will eventually be very successful in providing profitable international markets exposure to mainland China investors”, said Robert Grome, Asia Pacific Leader, Investment Management Industry and Real Estate Funds Practice of PricewaterhouseCoopers. “The speed and extent of wealth creation in China far exceeds the investment opportunities currently available in the country, and therefore exposure to international asset classes is inevitable. Clearly QDII at today’s market prices are far more attractive than back in September 2007.”

The three most important drivers of change in the Chinese market are regulatory changes followed by capital markets and distribution changes. The pace of change will be important and this survey suggests some continuing disappointment with the speed at which regulatory approval to develop the range of newer fund products is obtained.

“China’s regulators have always been careful to manage the growth of the fund management industry in a structured incremental fashion with limited experimentation of a product being followed by a broader roll out. The severity of the global financial crisis and the ongoing volatility in many asset classes globally means that we must expect the Chinese authorities to remain cautious with market liberalisation initiatives”, Mr Grome continued “Diversification across different asset classes is desirable for most investors but this is the feature that is currently lacking in the portfolios of most Chinese-based investors. Fund managers and investors will have to be patient.”

Two pressing issues have risen to the fore. In first position: cost control, which in the 2007 survey was in 19th position. In second place was the increasing competition of the domestic fund management companies. In 2007, the domestic fund managers were in 16th position. Recruiting and training personnel dropped from second position in 2007 to third position in 2009. Corporate governance became more pressing moving up from tenth position to fourth position in 2009.

“This is a clear signal that the challenging performance and market shrinkage in 2008 has had a major and on-going impact on the cost structures of the fund management companies,” Alex Wong, partner of PricewaterhouseCoopers based in Shanghai commented.

The most important factors for both recruiting and retaining employees were the base salary followed by short term incentives, association with a prestige brand and then long term incentives. The survey revealed that the staff turnover dropped in 2008, almost one third of respondents experienced less than 5% turnover.

While recruiting gives a relatively high score to base salary, retaining employees places relatively more weight on long term incentives than recruitment. According to the survey, the most important recruitment needs in 2009 were identified as investment management, sales and marketing, and research.

“It has become easier to recruit in 2008, but there has been no reduction in employee remuneration. Companies still believe it is difficult to hire experienced investment management personnel," Mr Wong concluded.
 

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Notes: About the survey

  • This survey focuses on the strategic and emerging issues surrounding foreign fund management companies in China
  • The survey attempts to synthesise diverse viewpoints, protect confidentiality and offer insights into this fast-changing investment market
  • This survey is based on interviews with CEOs and senior executives of 29 foreign fund management companies
  • The interviews were conducted in Beijing, Shanghai. Shenzhen and Hong Kong in January and February 2009