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Money Management

Firms lining up to do business with China’s Alibaba

Alibaba is seeing phenomenal success with its Yu’E Bao money market fund.

Money market fund success has managers eager for linkup

Money management firms looking to grow in China are finding many roads now lead through internet and financial technology giant Alibaba Group Holding.

The company's most spectacular foray into money management thus far has been its "leftover treasure" online money market fund, serving Alibaba's army of cellphone-wielding customers by sweeping up spare cash from their online AliPay accounts that would otherwise be laying fallow. In the space of less than five years, the fund, called Yu'E Bao, has become the world's biggest money market fund with roughly 1.7 trillion renminbi ($262 billion) in client assets.

Over the past six months Alibaba's financial affiliate, Ant Financial Services Group, has been making another splash with the launch of Ant Fortune — a platform for third-party money managers to market their funds to Alibaba's huge customer base.

Ant Fortune has "created a lot of buzz (and) a lot of companies, like us, want to get on its platform," intent on catching the e-commerce wave, said Allen Yan, deputy CEO of Shenzhen-based RongTong Asset Management Co., a 60-40 joint venture between Beijing-based New Times Securities Co. and Tokyo-based Nikko Asset Management.

Ray Chou, a Shanghai-based partner with consulting firm Oliver Wyman Group, said digital disrupters, led by China's internet and online commerce giants, have grabbed a roughly 30% share of the mainland's fund distribution market by "tapping into underserved customer segments with high mobile penetration."

He said they've gotten that far by "linking financial services seamlessly" to online demand, applying artificial intelligence and advanced data analytics to leverage the data their customers' spending patterns and other behaviors generate, to improve customer targeting and expand offerings.

Banks still big in China

Banks still dominate China's distribution landscape with a roughly 50% share, while other traditional financial firms control the rest, said Mr. Chou.

While there are "hundreds of platforms out there," Ant Fortune stands out for the sophistication of the artificial intelligence tools it provides money managers to serve cellphone-focused customers and a 520-million-strong user base "no one else can match," said Le Shen, a Beijing-based spokesman for Ant Financial Services.

That combination has caught the attention of global asset management firms.

When Massachusetts Mutual Life Insurance Co. agreed in August to sell its Hong Kong insurance arm to Alibaba affiliates in exchange for a 25% stake in Alibaba's Yunfeng Financial Group, Eddie Ahmed, the head of MassMutual International, cited potential opportunities to partner with "an innovative network of entrepreneurial Hong Kong- and China-based businesses" on initiatives from big data to asset management as one charm of the deal.

A Springfield, Mass.-based spokesman for MassMutual declined to provide further details until the deal is completed later this year.

Thomas Cheong, Hong Kong-based president, North Asia, with Principal Financial Group Inc., in an interview attributed the strong 2017 his firm's Beijing-based joint venture with China Construction Bank Corp. enjoyed to its "breakthrough with Alibaba."

CCB-Principal Asset Management Co. was one of seven managers selected to join Alibaba's Tianjin-based Tianhong Asset Management Co. in managing money market funds for customers, and one of an initial separate class of seven firms selected to offer a broader range of funds on the platform, said Mr. Cheong. He declined to say how much CCB-Principal manages from the platform.

Ant Financial's Mr. Shen said the number of money managers offering funds on the Ant Fortune platform has grown to 25 over the past six months.

Daniel J. Houston, Principal Financial's chairman, president and CEO, said during an earnings call for the quarter ended Sept. 30 that CCB-Principal's success in getting on Alibaba's online financial platforms "contributed meaningfully to our $15.6 billion of positive net cash flow for the quarter in China."

Mr. Cheong said the opening for CCB-Principal and the other firms has coincided with signs of growing concern from regulators about the scale of the more than $260 billion Yu'E Bao fund.

The CEO of a Shanghai-based fund management company, who declined to be named, said having a sum of money "bigger than two major commercial banks" overseen by one small money management firm has left regulators worried that a market crisis could spark a short-term liquidity squeeze capable of shaking the banking system.

Mr. Houston, while conceding the bulk of CCB-Principal's third-quarter net inflows were "short term in nature," said the Alibaba platform business was boosting CCB-Principal's name recognition and "contributing to our efforts in China."

Getting on Ant Financial's digital distribution platform required CCB-Principal to "adapt operations to a company that works 24/7," where an ability to decentralize decision-making becomes critical, contended Mr. Cheong.

Meanwhile, Alibaba's fellow online giant, Shenzhen-based Tencent Holdings Ltd., obtained a license from the Shenzhen authorities at the start of 2018 to sell third-party funds. Asked if the two heavyweights would pursue similar strategies, a Tencent spokeswoman said in an email that "our strategy of financial services or products on our platform is quite unique" and probably can't be compared with other platforms at this time.

Well-positioned

Money management executives on the mainland predicted Ant Fortune could continue to gain heft as a distributor. It's still a relatively new entrant but "whoever owns the clients" is well-positioned to call the distribution shots, said the Shanghai-based CEO, adding "we have our own direct sales" but the Alibaba platform is set to become "very, very important."

It's "fast emerging as an important channel for fund distribution," agreed Mr. Cheong, noting the platform offers access to a new customer segment comfortable "conducting their finances online rather than within the banking hall of a traditional bank."

The platform's move last year to slash the prevailing front load fee imposed by major banks and brokers by 90% is one sign of how disruptive the rise of Ant Fortune could prove for the industry, executives said.​

But the CEO of another Shanghai-based money manager, who likewise declined to be named, predicted Ant Fortune will face a number of hurdles challenging the banks and brokers that have dominated the distribution landscape.

One test will be how sticky assets prove to be on the Ant Fortune platform, said the CEO, noting the ease of buying funds with a few clicks on a mobile phone can be matched by the ease of selling, particularly if lower front-load fees effectively reduce the costs of coming and going.

Meanwhile, if Alibaba eventually moves beyond its spectacular money market fund and attempts to add a broader range of strategies, it will end up competing with the managers using the platform, creating potential conflicts, the CEO said.