Alibaba is shaking up Asia, first with an approval to act as a third-party distributor and then with a half-a-trillion renminbi money market fund. The participants of our roundtable in Hong Kong discuss e-commerce, product evolution and the mutual fund recognition agreement between Hong Kong and China. Chaired by Stefanie Eschenbacher.
Terry Pan (JP Morgan Asset Management, managing director)
Young Zhao (Haitong International Asset Management, managing director, head of business & product development)
Xiaofeng Zhong (Amundi Hong Kong, chief executive officer, North Asia)
Michele Bang (Eastspring Investments, deputy chief executive officer)
Wing Chan (Morningstar Asia, director of fund research, Asia)
Sharon Yang (GF International Investment Management, head of institutional salest)
Lieven Debruyne (Schroder Investment Management (Hong Kong), chief executive officer)
Funds Global: The Alibaba Group Holdings recently received approval from the Chinese regulators to act as a third-party distributor to sell funds online. How do you see e-commerce evolving?
Sharon Yang, GF International Investment Management: E-commerce is rapidly gaining traction, and it has received a tremendous boost from Alibaba. The top ten asset managers in China are already scratching their heads, trying to figure out how they can broaden their distribution channels online. Only a handful of them are making progress with e-commerce.
Wing Chan, Morningstar Asia: Traditionally, about 80% of all fund sales have happened through banks in China. With extensive reach to potential customers and their data, and ease of transaction, this e-commerce evolution is seen as a new way for asset management companies to open up an additional, low-cost distribution channel for asset managers. This said, there are challenges surrounding security and coming up with products that go beyond the success of Yu’e Bao.
SY: The top two banks alone dominated over 40% of the overall distribution in China. We want more diversity, more competition on the distribution side. E-commerce gives asset managers back some of the control. The asset management industry in Hong Kong and China is excited about the prospects of e-commerce: it could mean a move away from a distribution model where important decisions are largely determined by a third-party, the banks.
Lieven Debruyne, Schroders (Hong Kong): One question is whether the regulators will allow platforms like Alibaba to offer a full range of funds. The experience of one money market fund is not easily replicated across a range of funds.
FG: The internet giant raised up to 500 billion renminbi ($81.4 billion) with its Alibaba Yu’e Bao money market fund, without using banks, making it the world’s fourth-largest fund in a few weeks. How do you view these developments?
SY: Even though Alibaba has recently received a licence as an independent third-party distributor, questions over regulation remain.
Young Zhao, Haitong International Asset Management (HK): E-commerce is already an important part of the financial services industry in China, but the growth rate may slow down. The success of selling the money market fund online may have been an exceptional case due to the rigid interest rate scheme offered by the banks and the higher yield offered by the money market fund as a contrast. However, as interest rates are dropping quickly for the money market fund, investors will search for higher-yielding products and the money market fund will be less attractive. It will be even more challenging to sell exotic products online because of regulatory concern and client risk.
SY: On the product side, it is more likely that plain vanilla products will be distributed online in China. E-commerce is useful when targeting customers with a small amount in their bank account who are looking for cash management, such as money market funds.
YZ: Banks have started to fight back by cutting some favourable terms for the money market fund, such as the non-penalty clause for early termination. The money market fund acts as an aggregator for millions of investors and faces the banks as institutions and thus enjoys institutional benefit. The banks get the worse of the deal by giving up the large profit margin charged on small amount deposits.
LD: Is online advice and the availability of financial products online going to increase? Undoubtedly. One of the main drivers behind this is people getting more comfortable – it is a generational shift. Different e-commerce models will be evolving; it is not necessarily going to be all about Alibaba and Amazon. Without advice, the success of e-commerce will be limited, however.
Michele Bang, Eastspring Investments: Asset managers need to rethink their distribution model because they cannot simply rely on the status quo of distribution. E-commerce is here to stay and it allows asset managers to reach client segments they have not been able to reach before. However, investor advice and the after-sales aspect of the client relationship need to be taken into careful consideration in order for this model to be successful.
LD: What is stunning, though, is that some of these platforms offering lower-fee solutions have been around for many years in Hong Kong, but have gained very little traction.
SY: E-commerce is going to be too big to ignore, but it is not going to replace, or even surpass, the distribution capability of banks. Banks will remain the dominant distribution channel for many years to come. While e-commerce is gaining traction among those who are comfortable buying online, it will not appeal to all types of clients. Banks and direct sales from asset managers will still play a role because it will appeal to older generations and high net-worth clients.
YZ: There are still many people with small amount deposits of 2,000 renminbi or less and banks do not care for them.
Terry Pan, JP Morgan: But once you have 1.3 billion of them, the situation changes.
YZ: Those with few savings are being ignored by banks, so asset managers can turn to e-commerce to raise assets from them.
LD: Alibaba Yu’e Bao is now the fourth-largest money market fund in the world, but it has been raised among people that had a cash balance on an e-commerce platform. What can Alibaba subsequently do with this client base? And what is it allowed to do? Facebook, for example, faces the same questions. When Facebook bought WhatsApp, it suddenly had a vast amount of data. This is a hugely powerful source of information.
Xiaofeng Zhong, Amundi Hong Kong: Yu’e Bao is something beyond the industry, it is a Chinese marketing coup, something spectacular. Anything spectacular is not settled, hence it may not stay in its present shape.
LD: Alibaba Yu’e Bao is not necessarily about the amount of money it has raised, it is about the fact that they have more than a hundred million people among their clients with an investment account. How will Alibaba capitalise on the data it has gathered with Alibaba Yu’e Bao? Perhaps Alibaba can find a way to work with the regulators and with asset management companies.
SY: Some banks are worried about how powerful Alibaba has become and have taken drastic measures to boycott it.
TP: Such a large client base means Alibaba will also have to develop a powerful and efficient infrastructure. What if 10% of investors suddenly decide to place an order.
XZ: Indeed, there needs to be seamless, efficient technology that can operate without errors if operating on such a large scale.
TP: E-commerce in general will need a combination of the latest technology and scale.
SY: The most pressing concerns still centre on regulation because all aspects of financial markets in China are highly regulated, more than in other countries. We have no idea how regulation regarding e-commerce is going to evolve, and regulators could completely change the landscape.
LD: The retail distribution review in the UK, which imposes a ban on commissions paid from asset managers to advisors, fundamentally changed the distribution landscape. The regulation means that a certain segment is no longer of interest to advisors. Therefore, alternatives like Nutmeg have popped up.
MB: Given regulatory changes it is not inconceivable that e-commerce businesses may take a stake in asset management companies, and attempt to seek to create technological synergies in the future.
FG: Since plans for mutual fund recognition between Hong Kong and China were first revealed in early 2013, international asset managers have launched more Hong Kong-domiciled funds and strengthened their local presence. What’s your strategy?
TP: Despite the hype around mutual fund recognition, there are a lot of questions that still need to be answered. Asset managers have been flocking to Hong Kong in the anticipation of getting access to the Chinese market, but they really have to ask themselves if they can offer products that are relevant. It is probably fair to say that many may not have fully appreciated the distribution and business complexities in a market as vast and diverse as China.
YZ: Mutual fund recognition is less of a topic for brokerage-background Chinese asset managers like us because brokerage asset managers had not been allowed to launch
public funds in China until mid-last year. As a result, we do not have a comprehensive product suite and fund track records onshore to bring to Hong Kong and most of our Hong Kong products are China-related, which are less advantageous to distribute in China.
While we are excited about the development of the asset management industry with the potential mutual fund recognition, we should stay mindful on the policy risk of this initiative as it may expand quickly to other jurisdictions as the renminbi qualified institutional investor (RQFII) programme does. Asset managers need to carefully consider their strategies.
XZ: We are gearing up our product range and infrastructure to make a move once the scheme is in place.
MB: Most of us already have a significant presence in Hong Kong, and our strategic thinking is different from other asset managers, which are creating funds in Hong Kong in anticipation of mutual fund recognition.
WC: Some international asset managers already have a range of funds domiciled in Hong Kong. Those coming to Hong Kong now, be it for reasons of mutual fund recognition or others, will face many hurdles.
The costs of setting up new funds in Hong Kong will be substantial; these costs will eventually be borne by investors, who, no doubt, will take total expense ratios into consideration. It takes time for asset managers to reach critical mass in their funds and make their range economically viable.
SY: We plan to bring our China-domiciled funds to Hong Kong, but there are challenges on both sides of the border. The funds we could create under the RQFII scheme so far are subject to various investment restrictions.
The public funds under the RQFII programme have a limited track record due to the short history, which is something that is also true for our direct competitors.
In comparison, the mutual funds we offer in mainland China have a track record. We have made a conscious decision to focus on building our distribution channels in Hong Kong to market onshore funds under the mutual recognition instead of setting up more new public funds based in Hong Kong.
We are speaking to large banks and are exploring a range of opportunities. The feedback is positive and encouraging.
FG: Lobbying efforts from Europe have failed to make Ucits an eligible fund structure under mutual fund recognition. What is your stance?
SY: Ucits was not part of the initial discussion of mutual fund recognition; mutual fund recognition has always been between Hong Kong and mainland China. That said, it would be of interest to European asset managers and authorities to promote Ucits funds in mainland China.
And onshore Chinese investors would be better off having Ucits as another option for product diversity purpose. Discussions are under way. But there is little indication this will happen any time soon. In any case, it is more likely to evolve as a Greater China than a global scheme at the initial stage.
TP: Allowing Ucits into the scheme could be an interesting move: it would drastically increase the number of products available to investors. Whilst Chinese asset managers have gained some experience investing internationally, their actual experience dates back only to 2007.
SY: Regulators in Hong Kong and China will need more time to fully develop mutual fund recognition before including Ucits funds, or any other countries for that matter.
MB: The focus has been on new fund registration, and the possibility of making funds available elsewhere. As an industry we need to consider the entire chain. How are funds going to get sold and serviced?
While Ucits is a widely used structure in Hong Kong, other countries, like Japan and Korea, have not embraced it. The challenge for asset managers is not so much making the product legally available for sale in local markets, but also about delivering product features that meet client demand: local currency share classes, monthly, quarterly distribution share classes, hedged and non-hedged share classes, to name a few.
LD: International investing in China has been available since 2007 so mutual fund recognition is more than simply making international funds available there. Asset managers tend to underestimate the operational and distribution challenges in China.
MB: The way transfers are done in Ucits funds is different from that in China, which has its own system.
FG: Under mutual fund recognition, Chinese asset managers have an opportunity to promote onshore products internationally via Hong Kong. How can they leverage the capability of their Hong Kong subsidiaries? How does this change the market dynamics?
SY: We have been building our Hong Kong fund operations without putting too much focus on launching new funds. Building a track record, establishing our brand and widening our distribution channels feature high on your agenda. We have a shortlist of products for the Chinese market that could be relevant for retail investors in Hong Kong, and have been speaking to distributors here. At the same time, we are looking for ways to partner with international players that have ambitions to bring their products into China.
YZ: Chinese asset managers typically have smaller subsidiaries here in Hong Kong. It is likely that many of them will shift their efforts from becoming a manufacturer in Hong Kong to building a sales force and strengthening their distribution relationships in Hong Kong, at least for the time being.
SY: We have a portfolio management team in Hong Kong, which is concentrating on onshore China concept equity and fixed income investments – both long and short – that are listed in Hong Kong or the US.
FG: Certain aspects of mutual fund recognition – the quota system, distribution, tax matters and eligibility – have yet to be clarified. What are your main concerns?
TP: There are important lessons from the qualified foreign institutional investor scheme to be learnt.
LD: We still do not have a date for mutual fund recognition, but it is highly unlikely that it will be announced before the implementation of the Shanghai-Hong Kong Stock Connect, which is scheduled for October this year.
TP: Asset managers will have to wait for the final rules before they make more plans, and this constitutes a policy risk.
LD: We need to put the opportunity posed by mutual fund recognition into perspective: this is not going to be a full-blown scheme where every asset manager will be able to sell funds across China to all investors.
FG: Which products are suitable for Chinese investors – and how would you distribute them, given that some 80% of sales happen through large state-owned banks?
LD: On the product side, we need to think about what how we can offer mainland investors diversification – something they cannot buy already.
We also have to realise that it is a nascent market, and therefore it needs to be a fairly simple product that is easy to explain. On the distribution side, there is no way around a distribution partnership with a bank.
SY: It is likely to be plain vanilla products; there are restrictions as to what local asset managers can now offer to their clients in China so it is unlikely that foreign investors will be able to come in with exotic products.
XZ: Appetite for overseas investments is increasing among Chinese investors, especially in the light of a slowdown of its economy and a depreciation of the renminbi. International asset managers have an important role to play when it comes to guiding Chinese investors.
LD: It is also likely that mutual fund recognition will require asset managers to work with only one distributor. This means they will have to define what they want to achieve and find common ground with a distributor.
TP: China is a lot larger and more diverse than other domestic markets. When it comes to scale and complexity, selling in China can be compared to some extent with selling in the US.
MB: Large state-owned banks in China will have more than 500 branches across the country, but they will rely on asset managers on the ground to do a lot of the after-sales client servicing.
Asset managers need to think about the scale required to service such a multitude of branches or chose a certain region or branches only.
XZ: It is unlikely that asset managers will consider sophisticated products, at least not initially. Given the sheer size of China, however, it is possible that even plain vanilla products could be successful.
LD: International banks sell Ucits funds in China every day, and they focus on one segment of the market where there is growth and demand.
YZ: While retail investors will favour low-risk, plain vanilla products, there is likely to be a demand for more exotic products from high-net-worth individuals for absolute-return, multi-asset or global macro strategies.
MB: The Chinese Securities and Regulatory Commission has not yet given any indication as to what types of products will be eligible under mutual fund recognition, but it is likely that these will be plain vanilla ones. There is a large and diverse client base in China that is maturing, and there will be demands for all kinds of products.
LD: We should not get too far ahead of ourselves. Initially, the focus will not be on selling to investors in third-tier cities, because asset managers will be limited in their activity by the quota system. They will not be able to invest in a tremendous campaign spanning across China if they can only make sales of the equivalent of $200 million. How much will one invest in building a brand? One needs to be selective.
FG: What role can joint ventures play when it comes to distribution?
LD: Two asset managers dissolving joint ventures says little about the state of the industry. Those two were small joint ventures. It could be an advantage to have a joint venture with a bank. Ours will help distribute our funds in China under the mutual fund recognition scheme.
TP: Joint ventures are hard work by nature; we have had many joint ventures in different parts of the world and they have been enjoyable yet hard work. In China in particular, many joint ventures have been formed simply because it was the only way foreign asset managers could be part of the China growth story and tap into it. Some asset managers have decided not to have joint ventures because they want to own everything.
MB: We have had three joint ventures in three complex markets in Asia – China, Hong Kong and India. Having a good relationship with joint venture partners is key, but both parties need to think about how they can add value to the business.
TP: There is no guarantee for success in any business, but with two shareholders, whose individual priority or agenda may be changing, a potential break-up is inevitable. In a joint venture, partners bring different things to the table and as time goes on, the strategy may change.
WC: Historically, China has been a closed market and the funds offered to investors there are different to what is being offered to investors internationally. We have seen that some foreign asset managers have struggled in China when they wanted to instil their own philosophies and management styles – there has definitely been a culture clash.
Those who have local investment professionals managing their funds in ways that take into consideration domestic cultures tend to be in a better position than those who have not.
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