CCB Principal Asset Management Corp. Ltd. is seeking regulatory approval for three of China's first risk-focused fund-of-funds products aimed at individual savers — an as yet undefined but potentially huge segment of the country's retirement market.
Sun Zhichen, CEO of the Beijing-based joint venture between China Construction Bank and Principal Financial Group, said in an interview that the proposed low-, medium- and higher-risk funds of funds his firm has presented to regulators have been two years in the making.
Over that time, CCB Principal has built a dedicated 20-member team with deep experience in overseas pension markets to work on “fund-of-funds product development, marketing, distribution, investment and research,” he said.
The starting gun for CCB Principal's efforts came in early 2015, when the China Securities Regulatory Commission first signaled its support for multimanager fund-of-funds products aimed at a retail investor audience.
The central government was moving to flesh out a multipillar pension system and CCB Principal — which had yet to obtain the licenses needed to manage money for the country's national pension system or corporate “enterprise annuities” — quickly decided that serving “pillar 3”, or individual retirement savings, was a strategic priority, Mr. Sun said.
China's demographic profile points to both huge challenges and equally huge opportunities in that market segment.
The number of Chinese 60 years or older is set to surge to 400 million by 2050 from an estimated 240 million by 2020, noted Mr. Sun. At present, that cohort has no “allocation-driven, long-term-oriented products” to help them achieve financial security in retirement, he said.
The CSRC followed up its positive 2015 “guidance” on funds of funds for retail investors by announcing concrete regulations for those products in September 2016. In contrast to the funds-of-funds rules promulgated a few years ago for high-net-worth and institutional investors, which allow investment in private funds that employ futures and derivatives, the retail products must invest 80% of their assets in equity, fixed income and money market funds. The remaining 20% can be invested directly in specific stocks and bonds.
Since the end of November, 24 local firms submitted proposals for a combined 34 funds-of-funds products.
The next step, said Mr. Sun, will come when regulators approve the first products for the market.
Market watchers, who declined to be named, said those approvals could come out over the next month or so.
Mr. Sun said once regulators begin approving funds of funds, “the market will grow very fast.” If the experience of more mature markets is a guide, those vehicles could claim close to a 1 trillion renminbi share of China's more than 9 trillion renminbi ($1.3 trillion) mutual fund market, fueled by the rapid graying of China's demographic profile, he predicted.
At the start, however, it will likely take considerable effort to facilitate the growth of what is a new market in China.
“We plan to make efforts in product layout, market development, guiding individuals on the necessity of being responsible for post-retirement financial well-being, brand building, distribution channel maintenance and investment experience accumulation,” Mr. Sun said.
Despite the challenges, in a Chinese retirement market where, by necessity, the national and corporate pension pillars have more of a one-size-fits-all approach to risk, Mr. Sun said products such as the ones his firm has crafted can differentiate themselves by seeking to better match the needs of individual investors.
CCB Principal's initial gambit is focused on serving up “risk-based fund-of-funds products to meet the different risk appetite and different allocations needs of investors,” taking account of their age, income and other factors, he said.
In that respect, they'll be akin to the choices facing Australian superannuation plan members, he said.
CCB Principal's first trio of funds — its “China Fortune” series — will offer individual savers a higher-risk, medium-risk and low-risk option, employing external funds as well as internal funds.
CCB Principal executives noted China's regulators have removed incentives for funds-of-funds providers to favor their own funds by prohibiting providers from charging a double layer of fees in instances where internal funds are chosen.