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Wall Street firms struggle to keep up in China mutual fund boom

[NEW YORK] From BlackRock to Vanguard Group, global asset managers have been dazzled by the promised riches of China's US$3.4 trillion mutual fund industry. However, they're now learning just how fierce the local competition will be.

Funds backed by international firms raised US$470 billion from retail investors in the first eight months of the year, less than half the US$967 billion haul of their 100-plus Chinese rivals, according to data compiled by Morningstar and Bloomberg. Of the top 10 biggest funds raised this year, only two were backed by foreign companies.

Foreign companies are having to grapple with how little their size and global reputation matter in a market infamous for investors jumping from fund to fund in search of the next big thing. Domestic rivals have pressed their home-field advantage, picking up a lion's share of almost US$6 billion in fees generated in the first-half alone.

The locals are more adept at tapping star stock pickers who live-stream on platforms such as Alipay giving fund picks and explaining basic investing concepts and social-media influencers who can boost a fund manager's popularity with a single endorsement. That's turning into a fledgling distribution network rivalling that of banks.

The average fund size of foreign-backed funds stood at 1.7 billion yuan (S$341.3 million), compared with nearly two billion yuan for Chinese funds.

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"China's mutual fund industry is undergoing a drastic land grab - local players are leveraging their first mover advantage," said Chloe Qu, an analyst at Morningstar China. "The mutual fund business has become increasingly cut-throat in China, not just competitive in terms of investment but also distribution power and talent retention."

To be fair, China only recently allowed foreign companies to take a majority or full stake in a local mutual fund operation, as part of a broader opening up of the financial industry. Also many of the foreign-backed funds could be operated by Chinese counterparts, while the international companies only hold a passive stake.

More than 40 global companies have set up joint ventures and some have applied for greater control. BlackRock last month received approval to set up a fully controlled mutual fund company. Vanguard has a robo adviser joint venture with Ant Group, and said it's in the process of applying for a mutual-fund licence.

Adding to the challenge, escalating tension between China and the US, and the Covid-19 pandemic has slowed the pace of foreign asset managers from taking more, or full, control of their local joint ventures. That might make it harder to attract or retain talented portfolio managers.

"Stability is one of the key challenges that foreign joint ventures face, especially for those who will potentially go through stake changes," said Morningstar's Ms Qu. As foreign funds increase their control over local ventures, that will result in management changes, which could potentially lead to some staff turnover, she said.

Local funds' have performed almost as well as foreign firms this year, meaning the US, European and Japanese companies looking to expand in China need to work even harder to stand out.

A key part of whether these global firms can succeed depends on how much autonomy the overseas headquarters grant local managers, said Peter Alexander, managing director of Z-Ben, a Shanghai-based consultancy that advises global funds in China. Local staff need to be able to make timely decisions rather than await sign-off from head office, he said.

That strategy has worked for US-based Invesco. The company's China joint-venture has raised 50.7 billion yuan for mutual funds started this year as of mid-August, according to data provider Wind, more than any other global firm.

Invesco, which has been in China since 2003, encourages its fund managers to live-stream on platforms like Alipay, said Ken Kang, Shenzhen-based chief executive officer of Invesco Great Wall. The company also actively manages its rankings with local influencers who command millions of followers, and the banks that distribute its funds.

"With the landscape becoming more competitive, Invesco places a lot of trust in the China team and our joint venture has a flat structure so decisions can be made locally," said Mr Kang. "Fund managers are also evaluated on a long-term basis, part of the reason we have low turnover."

As simple as that may sound, few global managers have been doing it right, said Mr Alexander. That's prompted Z-Ben Advisors to lower its forecast of foreign companies' market share in China's mutual fund industry by 10 percentage points to just 15 per cent of the industry by 2030.

Global asset managers tend to have stricter control in selecting distributors, limiting their options to expand as well, said Lu Haiyang, chief executive officer of wealth adviser Hongtai Wealth.

That makes it especially difficult for them to partner the burgeoning online platforms, a growing force in China's fund market. From the perspective of local distributors, foreign companies are often not appealing either in the key areas of management teams or track record, Ms Lu said.

"In a market with two-way selection, foreign funds can hardly grow rapidly in a short period of time," she said.

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