The first global managers licensed to offer mainland-managed strategies to qualified investors in China are playing the long game in a market set to become the asset management industry's growth engine.
Shanghai-based executives at some of the eight firms with the licenses needed to manage money for local high-net-worth and institutional investors say they're focusing on building compelling track records as they add depth and breadth to local teams handling investments, operations and client service.
A Nov. 7 report by asset management consultant Casey Quirk by Deloitte suggested the payoff awaiting those who succeed. The report predicted half of the global asset management industry's $17 trillion in net inflows between 2017 and 2030 will come from retail, high-net-worth and institutional investors on the mainland. But foreign firms, the report warned, are likely to garner a mere 6% — or roughly $500 billion — of the $8.5 trillion in Chinese inflows.
Executives with foreign firms in Shanghai said they aren't looking for a quick payoff.
Neuberger Berman's leadership is "prepared for a long build," said Patrick Liu, who joined the New York-based firm's wholly foreign-owned enterprise in Shanghai early this year as general manager and head of China.
The "real bet" represented by Neuberger's local operation in Shanghai is a long-term one on China, Mr. Liu said. Executives are positioning the firm to partake in that market's heady growth by offering institutional-quality strategies before institutional investors become the dominant players there, he said.
While the race to win the hearts, minds and allocations of Chinese high-net-worth and institutional investors will be more of a marathon than a sprint, there are shorter-term hurdles to overcome as well.
For example, firms that garner private fund manager licenses from the quasi-official Asset Management Association of China must launch their first investment strategies within six months of clearing that final hurdle to doing business with qualified investors on the mainland. And because the regulations governing WFOEs with private fund manager licenses require strategies to be managed onshore, many in that first wave of competitors have had to expedite their efforts to build investment and operational capabilities in Shanghai.
In a market crowded with domestic competitors, foreign players without "a lot of relevant experience" in China could face an uphill battle explaining to prospective clients "why you as a foreign manager" offer them better prospects, said Stewart Aldcroft, Hong Kong-based CEO of CitiTrust Ltd. and senior adviser to its Asia fund management team.
Whether managers can make the case that their investment style gives them an edge is something they are "going to have to work out," Mr. Aldcroft said. It could prove to be "quite a long process," he added.
First offering in January
Mr. Liu said Neuberger Berman, after garnering its private fund manager license in November, is expecting to launch its first offering — a fixed-income strategy — in late January.
He said the opportunity to hire Peter Ru, a veteran of Morgan Stanley (MS) Investment Management and Invesco (IVZ), to lead Neuberger's fixed-income team was one factor favoring a bond strategy as the firm's initial offering. Mr. Ru joined Neuberger in September with his trader, Mr. Liu said. An assistant fund manager at Neuberger has since relocated to Shanghai from Hong Kong and two more credit analysts will be hired by the end of January, he said.
Another factor favoring that "relatively safe asset class" was the importance of launching a strategy that offered the prospect of steady, strong performance, Mr. Liu said. With "so many private funds in the market, you don't get many shots" in forging ties with important distributors, and a fixed-income strategy looked to be a better first step than an initial offering in the crowded, volatile equity space, he said.
Jackson Lee, country head, China, with Fidelity International's Shanghai affiliate, said Fidelity's extensive operations on the mainland, including a team of about five Shanghai-based analysts hired in 2011 and integrated into the firm's global research network since then, is a cornerstone of the story Fidelity can tell about what makes the firm unique in the competitive landscape in China.
By the time Fidelity launched a bond strategy on the mainland in April, the first WFOE with a private fund manager license to do so, its analyst team had grown to 10, roughly half covering domestic equities and half covering domestic bonds. The team should grow further during the coming year, said Mr. Lee. "We've hired a trader onshore and are in the process of relocating an equity portfolio manager to Shanghai from Hong Kong," he said.
Mr. Lee said Fidelity's first strategy has succeeded in gathering assets, but declined to provide a specific number. "What I can tell you, this year is about us getting the license, building up the team, (and the firm's) operational capabilities" and getting the Fidelity brand known, he said. "We've been focusing on developing product, building investment capabilities, establishing relationships with distributors — doing all of that," he said.
Other foreign firms have drawn on their respective strengths in selecting different asset classes for their maiden offerings.
Tim Wong, the London-based chairman of Man Group in Asia as well as chairman of the group's quantitative affiliate, Man AHL said his firm launched a commodity trading adviser strategy this month focused on liquid futures, including stocks, bonds, commodities and metals. The growing popularity of CTAs in China contributed to Man's choice, as did the fact that a quant strategy could be implemented more efficiently in Shanghai than an active, discretionary equity strategy, which would have required more extensive hiring over a short period of time.
A-shares strategy coming
Fullerton Fund Management, the Singapore-based firm owned by government investment firm Temasek Holdings, will launch a China A-shares equity strategy in the coming months, building on the firm's "more than 10 years of solid experience in the local market," said Mark Li, Fullerton general manager and head of China sales, in an email.
Executives at the four remaining firms that have Shanghai-based WFOEs and private fund manager licenses now — UBS Asset Management, Hong Kong-based Value Partners, Atlanta-based Invesco (IVZ) Ltd. and Edinburgh-based Aberdeen Standard Investments — couldn't be reached immediately for comment.
High-net-worth investors could prove to be relatively low-hanging fruit in a market where institutional investors on the Chinese mainland still face considerable constraints in moving beyond allocations to fixed income.
"In the long run, the market will be dominated by institutional money," but for now a lot of that money still isn't allowed to go into the market freely, said Neuberger Berman's Mr. Liu.