The explosive growth of Chinaâs investment industry looks appealing from the outside, but Nick Fitzpatrick
finds dwindling talent pools and stagnant assets under management. However, regulatory help is on its way.
positions in mainland China’s mutual fund firms are so competitive now that there are only three managers with more than ten years’ experience of portfolio management in an industry that spans around 60 firms and 700 funds.
The industry is struggling to retain talent as successful mutual fund managers and analysts have left to work for unregulated firms where they can earn more money.
Others take early promotions to C-suite roles, such as chief investment officer jobs, where there is also a demand.
Further south in Hong Kong, there is also a war for talent, and though it is less severe, Hong Kong authorities at a recent roadshow in New York City let it be known to the Americans that although Asia is a good place for investment management, it ain’t a cheap one.
Add to this the constant demand by Chinese distributors back in the mainland for new products, which earn them lucrative fees and in some cases trailer fees of 70%, then China’s fund firms are under more strain, with more portfolio managers working across different funds and different assets. In fact there were more than 140 funds launched in 2010, which represented 20% of the total amount of funds available at the end of the year, according to PwC, the business services firm. Yet assets under management fell from RMB2.7trn (€25bn) at the end of 2009 to RMB2.5trn a year later.
The China Securities Regulatory Commission (CSRC) is not oblivious to these issues and is consulting on a revised fund law that, along with other potentially far-reaching changes for the funds industry, will make mutual fund pay more competitive.
“Recruiting and retaining talent has been an acute problem and it is at the top of the agenda for asset management CEOs,” says Jane Xue, partner, assurance, at PwC in Shanghai. “There has been a higher turnover of portfolio managers while the average years of experience required for taking on the portfolio manager role has reduced. Our research shows that across the industry in China there are just three portfolio managers who have more than ten years of experience in a portfolio management role. Many have been in the role for less than two years.”
The problem cuts right through China’s mutual fund industry affecting homegrown managers and joint ventures – particularly those that have fostered “star” fund managers.
Lu Jun is one such manager. He was CIO and also headed the China Advantage Fund at China International Fund Management, a joint venture between JP Morgan Asset Management and Shanghai International Trust. He set up Cong Rong Investment Management in 2007 and is now one of the most successful private fund managers in China, with 19 domestic equity funds and one Cayman-registered Greater China fund.
Fortune Sgam Fund Management, in which Société Générale is a shareholder, has lost fund managers to other firms over the last three to four years and, according to Ivan Shi, senior associate at Z-Ben Advisors in Shanghai, was unable to retain them despite introducing share incentives.
But the retention issue has affected many, many fund management companies. Portfolio managers can increase their salaries by ten to 100 times by moving to unregulated private firms, according to one observer.
Xue says: “Some managers have left the retail business and joined the segregated accounts division of the same business. Some go up the management ladder, while some might join other businesses like securities companies and insurance companies. Quite a few join private, unregulated businesses where there are more flexible pay structures.”
She adds: “A lot of fund management companies are trying to improve their in-house investment research and create a team-work approach so they do not have to rely on certain individuals, but they need reasonable time to train those people.”
The revised Fund Law for Securities Investment, which could be implemented as early as Q2 this year, is aimed in part at equalising pay structures between regulated public funds and unregulated private vehicles.
For example, it is proposed to allow managers to trade equities on personal accounts as long as activities are disclosed. This will allow firms to better incentivise staff. Firms will also be allowed to offer share incentives directly to employees.
But by bringing unregulated firms under the umbrella of regulation, it will open up the mutual fund market to private firms, increasing competition, as well as allow regulated firms to enter the segregated account market for high-net-worth and institutional business.
The influx of new players, if that is what occurs, is likely to increase the supply of new funds. This may be good news for distributors who can earn front and back-end fees by letting customers churn them, but it may exacerbate the current problem of shrinking fund sizes. Xue notes the recent increase in funds has not been matched by fund flows. “Total assets under management are stagnant. That means the average fund size is getting smaller,” she says.
But not all fund managers are suffering from this attrition of talent. E Fund Management, one of China’s largest managers with RMB197bn of assets at the end of 2010, and Guangfa with around RMB104bn, are two that have remained stable, according to sources such as Z-Ben.
One reason could be their base in the lesser known city of Guangzhou where salaries go much further than in Shanghai. Also, with less fund managers in Guangzhou, there may well be less poaching.
Shi, at Z-Ben, says: “We have not seen many portfolio managers poached from E Funds. It’s a big company and strong financially.
“E Funds started training young employees a couple of years ago to be portfolio managers. In comparison, other companies are suffering from outflows.”
His colleague Jonathan Ha, director, advisory services, adds: “There’s a degree of loyalty earned by taking someone who is fresh to the industry and training them up. And E Fund is in the top three largest managers, so why would people want to move.”
This is, of course, a sign that retention does not rest entirely on money. Gerry Ng, managing director at Baring Asset Management (Asia) in Hong Kong, says: “Paying enough money to people is good enough for a year or two, but after that you need a good product to work on.”
Simlarly, Nico Furze, of recruitment consultant Profile Search & Selection in Hong Kong, says of the Hong Kong market: “You do not get fund management professionals jumping ship for a couple of extra percent. The quality of the institution and its coverage is a key factor for some people, not just remuneration."
©2011 funds global