A regulatory push in China to reduce management and custodian fees on equity mutual funds will be of less benefit to institutional investors than retail, experts said.
One reason is because institutional investors tend not to invest in mutual funds directly. The other is that they already pay lower fees than retail investors.
And while regulators may hope that the new fee caps will help to revive a flailing stock market, experts added that improving investment returns would go further.
The China Securities Regulatory Commission on July 8 announced that newly registered active equity mutual fund products must charge less than 1.2% in management fees and 0.2% in custodian fees.
The ruling came after consultation with the industry and is part of a work plan to reform the public fund fee rate standards based on the development of the industry and the needs of investors, the regulator wrote in a statement.
After this change, the actual cost to investors will be lower than that of comparable global markets, according to a WeChat post by the China Securities Journal, an official media outlet designated by the CSRC.
"Some similar international markets charge an additional 0.6%-1.2% investment advisory fee on top of the management fee, so the actual fee rate of China's active equity funds will be lower than international rates after the reform," the post wrote.
The statements did not specify that the ruling officially included existing products, but several local investment companies, including some of the country's largest, cut their management fees on the same day.
For instance, E Fund Management Co., the county's top mutual fund asset manager by AUM in 2022, according to Fitch Ratings, cut management fees to 1.2% from 1.5%, and its custodian fees to 0.2% from 0.25%, according to a statement on July 8.
The fund manager had $396 billion in assets under management as of Dec. 31.
In a nearly identically worded statement, China Asset Management Co., with $262.7 billion in AUM as of Dec. 31, announced that it would do the same.
The management fee cuts were made effective on July 10.
Even without the regulatory ruling, fund managers in China have been under pressure to cut fees as redemptions have been high lately due to poor fund performance, said Wong Kok Hoi, founder and chief investment officer of APS Asset Management in Singapore.
The CSI 300 index has fallen 9.73% year-on-year as of July 20, as China's post-COVID-19 recovery disappointed investors. On July 17, Beijing posted 6.3% growth for the second quarter of the year, missing analyst targets of about 7.3%.
Mutual funds in China raised roughly 20 billion yuan ($2.8 billion) in June, and 30 billion yuan in May, lower than the monthly average of 36 billion yuan in 2022, and 174 billion yuan in 2021, according to data by the Asset Management Association of China.
The CSRC in 2022 called on domestic institutional investors to play a bigger role in the stock markets to help foster a more stable investing environment.
However, the new ruling on management fee caps is more likely to benefit retail investors than institutional investors, considering that they make up the bigger share of the mutual fund market, Mr. Wong said.
Retail assets made up 54% of mutual funds, while institutional assets accounted for 46% of mutual funds in China in 2022, according to a Fitch Ratings report.
Theoretically, anyone that invests in a fund product covered by this new ruling will be affected, said Conal McMahon, senior consultant at thought leadership company Three Lions AWM Advisory.
But institutional investors in China traditionally invest with fund management companies via segregated account channels, rather than directly into the mutual funds, so they might not be affected by the fee caps, he said.
In addition, institutional investors have more negotiating power and can pay fees of less than 1%, therefore they might not benefit from the fee caps, APS' Mr. Wong said.
APS Asset Management is a China-focused fund manager with $2.5 billion in AUM.
The regulator also seemed to focus on equity fund products, since other products such as bond mutual funds, exchange-traded funds and money market funds already charge much lower rates of 0.3% to 0.8%, said a senior executive at a Chinese financial institution on condition of anonymity.
Several foreign investment managers have set up or are in the process of establishing wholly owned fund management companies in China after a regulatory rule change in 2020 allowed them to do so.
Most recently, Schroders PLC was granted a license to start operations for a wholly foreign-owned public fund management company in mainland China. The company, with £737.5 billion ($965.5 billion) in AUM, has existing joint venture agreements with the Bank of Communications.
Schroders declined to provide comment about how the new fund management fee caps will affect its business plans in the country.
Other foreign firms with an investment management presence in mainland China include BNP Paribas, Fidelity International, J.P. Morgan Asset Management, Morgan Stanley, and Neuberger Berman Group, all of which declined to comment for this story. But sources said that such firms are aware of how the ruling can affect the business and are looking into it.
Ultimately, the industry will be on the watch for whether fee caps will help to stimulate the market, whether from retail or institutional investors.
The cost angle would appeal to investors, but the key factor driving fund sales is still fund returns. "The bear market in the last two and a half years has considerably weakened investor appetite for funds," Mr. Wong said.
