JPMAM sees control over joint venture a key to China

Dan Watkins, who took the helm of J.P. Morgan Asset Management (JPM)'s Asia-Pacific business in January, concedes there's much about the firm's strategic plans to tap into China's fast-growing asset management market that defies precise forecasts.

"I'm not sure this will be a linear story," said Mr. Watkins in a May 6 interview.

Instead, for a CEO overseeing a China strategy, "you have to be fairly comfortable you're making decisions that (your) successors are going to benefit from," all the while tracking changes in markets, regulations and rules and being ready to react when circumstances change, he said.

One big change could be dawning now.

On May 7, Shanghai International Trust Co. — JPMAM's partner in China International Fund Management Co. Ltd., the joint venture they launched in 2004 — announced it was putting 2% of its 51% stake in CIFM out for bid over the coming month. It is a prelude, analysts say, to JPMAM becoming the first foreign manager to win a majority stake in a fund management com- pany on the mainland. CIFM had 127 billion yuan ($18.9 billion) in assets under management as of March 31, excluding segregated accounts, a spokeswoman said.

Shanghai International Trust's move, at a moment of heightened U.S.-China trade tensions, marks the start of the "whole process of foreign majority ownership" for Chinese fund management firms, said a Shanghai-based research analyst, who requested anonymity. A Hong Kong-based spokeswoman for JPMAM declined comment.

Broader strategy

In his interview the day before, Mr. Watkins stressed the significance of such a development for JPMAM's broader strategy in the region. Becoming a majority owner of China International Fund Management "is a very important part of our expansion plans in China," Mr. Watkins said. "Discussions with our JV partners continue to progress."

Regulatory reforms more than a year ago opened the door for foreign partners to raise their stakes in joint ventures to 51% from a previous ceiling of 49%. Major firms — including JPMAM and Invesco (IVZ) Ltd. — announced their desire and intention to do so but until now none has succeeded.

Taking control of a fund management company on the mainland would amount to a significant step forward in building onshore businesses, noted Ivan Shi, head of research with Shanghai-based financial consulting firm Z-Ben Advisors.

But if JPMAM has been in the vanguard of foreign managers seeking control of their fund management company joint ventures, the money manager has been relatively quiet lately on the other major front in building onshore businesses — setting up wholly foreign-owned enterprises on the mainland to serve local high-net-worth and institutional investors, Mr. Shi said.

Other global firms have placed more emphasis on their WFOEs, which — three years after their global sponsors have garnered private fund manager licenses from the quasi-official Asset Management Association of China — can apply for the fund management company licenses they need to serve retail investors as well. To apply, however, a WFOE needs to have average high-net-worth and institutional assets of 2 billion yuan over the previous three years.

In Z-Ben's latest annual ranking of the top 25 foreign managers' China businesses, released in April, JPMAM remained in the top five, even as it slipped to third from second the year before.

Mr. Shi said onshore business — covering both joint ventures and WFOEs — accounts for a higher weight in Z-Ben's rankings than the inbound business of investing foreign money in China or outbound business, investing Chinese money overseas. He declined to give specific numbers.

Mr. Watkins called the wholly foreign-owned enterprise JPMAM set up two years ago — with 20 employees now and more hiring to come — "an emerging business" being built for the long term. The WFOE "will have a lot of my managerial focus" going forward, he said.

JPMAM's WFOE has yet to apply for a private fund manager license.

"My strategy at the moment is to look at (the joint venture and the WFOE) as two different things" providing different options, he said.

Earned reputation

The joint venture is a well-known company in the Chinese market, with more than 100 offerings, assets under management of more than 125 billion yuan and a set of client relationships built up over 15 years — "a really interesting piece of the strategy," he said.

JPMAM likewise has enjoyed considerable success selling its overseas funds to Chinese investors — through China International Fund Management — via the mainland-Hong Kong mutual recognition of funds program.

The firm's initial two funds approved by China's regulators — the J.P. Morgan Asian Total Return Bond Fund and the J.P. Morgan Pacific Securities Fund — have garnered roughly 70% of the program's flows from Chinese investors, Mr. Watkins noted. That, in turn, helped JPMAM top Z-Ben's latest subranking of foreign firms investing money for Chinese investors.

The WFOE, meanwhile, is a J.P. Morgan company with the J.P. Morgan name, giving the firm additional interesting options to access the market, Mr. Watkins said.

If China is the firm's main strategic focus in the region over the medium to long term, he said another priority now includes maintaining the healthy market share the firm has built up in its most established markets in the region — Hong Kong, Taiwan and Japan.

Among more immediate growth opportunities, the Asia-Pacific CEO said the one whose prospects he feels "most personally excited about" is building the firm's feeder fund network in key Southeast Asian markets, including Thailand and the Philippines.

"We've got 35 ... feeder funds or subadvised relationships across those markets," adding eight last year, Mr. Watkins said.

If Mr. Watkins' current business in the region is split evenly between institutional investors on one side and high-net-worth and retail investors on the other, he says his roots in the industry are very much on the retail side.

Mr. Watkins said he started off at a call center in 1997 in London, where he worked for three years. "It was the best foundation ... I could have wished for," he said. "There's nothing that makes you more determined to understand the full workings of an asset management business than knowing your job is to answer client questions. And I loved it."

Making moves

Mr. Watkins said he next moved into an operations role, a fund administration role, and after 10 years took on a regional leadership role in technology. He next served as chief operating officer for JPMAM's regional business in Europe until his appointment as CEO of the firm's Asia- Pacific asset management business. For the veteran who worked his way up from a London call center, China's fast-growing mutual fund market will remain a top opportunity.

The mutual fund market in China has quadrupled over the past four to five years, according to McKinsey & Co.'s numbers, and should double again in the next two to three years, noted Mr. Watkins. JPMAM "wants to be part of that growth story in China."