Russell's China deal hints at new model for managers

Russell Investments' second stab at partnering with a Chinese money manager could leave the firm positioned to benefit from anticipated growth of demand on the mainland for local as well as global multiasset fund-of-funds strategies without the need of taking on the minority joint venture partner status of its first go-round.

On Dec. 6, roughly 18 months after Russell sold its 49% stake in a Shanghai-based fund management joint venture with Ping An Insurance Co., the Seattle-based multimanager veteran announced a cooperative tie-up with a top mainland manager, Beijing-based China Asset Management Co.

Peter Gunning, Russell's Sydney-based chief executive for the Asia-Pacific region, said the “cooperation” Russell and China AMC announced gives the companies “a very strong alignment of interests” to build the local fund of mutual funds strategies that Chinese regulators approved in September for retail investors.

Some industry watchers predict this type of targeted effort could become a template for more deals between Chinese and foreign managers in coming years, even as the number of joint ventures - long the only route for foreign firms looking to access local retail investors - looks set to dwindle.

With the opening of other routes into China's markets in recent years, even foreign firms in successful joint ventures will have to consider whether those ventures really fit into their broader global strategies, said Bonn Liu, a Hong Kong-based partner with KPMG and head of investment management for the firm's Asia-Pacific business.

If the foreign side of the JV equation has changed, the Chinese side has changed as well. Local managers have grown confident enough in their own capabilities to no longer reflexively feel the need to rely on foreign partners to teach them the fundamentals of the money management business, noted one Shanghai-based executive with a foreign money manager, who declined to be named.

Increasingly, those Chinese managers will look for foreign partners only when those partners can help them with some “very specialized niche product,” he said.

Nicholas T. Omondi, an analyst with Shanghai-based financial markets consulting firm Z-Ben Advisors, agreed. As China's asset management market matures and offerings become more complex, there'll be more opportunities for global managers to pursue targeted opportunities without taking direct equity stakes in mainland-based fund management firms, he predicted.

Reforms allowing foreign managers to set up wholly foreign-owned enterprises to pursue asset management businesses on the mainland have been the biggest potential step forward for global firms eyeing China's capital markets. However an executive with one WFOE license holder, who declined to be named, said the guidelines that need to be hammered out before firms can pursue those opportunities remain a work in progress.

Under the agreement between Russell Investments and China AMC, Russell will advise the fund-of-funds business China AMC launched last year in areas such as factor exposures and diversification techniques.

The parties to that cooperation will be China AMC and Russell's Australian business because the wholly foreign-owned enterprise Russell established in Shanghai last year is only licensed for now to serve in an advisory capacity rather than as a money manager. Mr. Gunning said at some point, Russell could move to upgrade the status of its WFOE.

China AMC has “strong distribution and strong local Chinese capabilities,” while Russell has a long history of developing multiasset solutions, and “that's where the synergies are going to come in,” said Mr. Gunning, in the interview.

Even if China's fund-of-funds and manager-of-managers market segment is just getting off the ground, Mr. Gunning expressed confidence the huge and growing mainland market will follow the “natural progression,” seen in the U.S. and Europe, of greater demand for those “outcome-oriented, multiasset solutions” - and possibly at a quicker pace than those markets experienced.

The agreement likewise calls for China AMC to promote Russell's global multiasset, multimanager strategies to its institutional client base in China.

With Chinese regulators restricting investor outflows amid concerns that capital flight could undermine the renminbi's value in currency markets, Mr. Gunning said the opportunity for Russell to serve local institutional investors will remain limited, but at some point that will change. “At some stage, capital flows will be less constrained,” he added.

Coincidentally, the announcement by Russell Investments and China AMC came just more than a week after Ping An Asset Management Co., an affiliate of Russell's previous joint venture partner, announced its own collaboration agreement with Brisbane-based Queensland Investment Corp.

In an interview, Damian Frawley, QIC's CEO, expressed the hope that one element of his firm's discussions with Ping An would be to make his firm's alternatives offerings in infrastructure, real estate and private equity available to Ping An's clients.

And in July, China AMC announced a separate strategic tie-up with Boston-based PanAgora Asset Management to introduce China-focused risk-parity strategies to local investors.

Meanwhile, money management executives and investment bankers predict more of the remaining 48 joint ventures could dissolve in coming years.

Paris-based Societe Generale was reportedly in talks to sell its 49% stake in Shanghai-based Fortune SGAM to New York-based private equity firm Warburg Pincus LLC. A Hong Kong-based spokesman for Societe Generale declined to comment; a Warburg Pincus spokesman couldn't immediately be reached for comment.