Institutional mandates by Chinese banks are buoying local fund management companies, even as a weak domestic stock market has left their core mutual fund businesses treading water this year.
Some analysts say that institutional business could become even more important over the next few years as local regulators move to rein in another recent growth engine for fund management companies — the shadow banking-focused “subsidiary” affiliates they set up three or four years ago, which already boast combined assets under management of 11 trillion renminbi ($1.6 trillion).
A recent report by Shanghai-based financial markets consulting firm Z-Ben Advisors said heightened regulatory scrutiny of that loan-packaging business has left many fund management companies “choosing to taper (that business) and instead cater to growing institutional demand via segregated accounts.”
Ivan Shi, Z-Ben's director of research, said in an interview that with regulators effectively set to make it harder for fund management companies to be used as a conduit for banks looking to offload loans, Chinese banks have begun to aggressively shift assets on their balance sheets into fixed income. With the limited capacity of banks to manage those allocations internally, the result has been a spate of mandates for fund management companies.
“Fund management companies” — a term in China that specifically denotes firms able to manage and offer mutual funds for public consumption — are generally composed of three segments: the mutual fund-focused company; a segregated account business division able to manage mandates from pension funds, insurance companies, banks, corporations and high-net-worth individuals; and a “subsidiary” affiliate, which has been a catch-all, lightly regulated arm used for anything from non-standard financial projects to publicly traded securities.
China's regulators issued draft regulations for shadow banking activities a few months ago, proposing sharply higher requirements for paid-in capital that could force fund management companies to inject tens of millions of dollars into their subsidiaries simply to sustain the business they already have on their books. Final regulations will likely come out over the coming month or so.
When the capital required to engage in subsidiary-related businesses was minimal, fund management companies could count on volume to achieve a decent return on equity of 20% to 30%, said Allen Yan, deputy general manager of Shenzhen-based Rongtong Fund Management Co., a joint venture between New Times Securities, Shenzhen, and Nikko Asset Management, Tokyo. With higher capital requirements coming, many competitors will find the economics no longer work for them, he said.
That shadow banking business segment is poised to “slow down tremendously,” said Mr. Yan, who predicted fund management companies will strive to refocus their subsidiary affiliates' efforts on more profitable investments, such as private equity or asset-backed securities.