Nicholas Pratt examines how China’s biggest funds attract so many subscriptions and asks if European funds can replicate their success.
In January, a Chinese mutual fund launched by E Fund Management raised a staggering CNY337 billion (€43.7 billion) in subscription money – nearly 16 times more than its fundraising target.
Such numbers are not new in China and it follows an impressive year for the country’s mutual funds industry. Assets rose by 48% to a record $3.1 trillion (€2.6 trillion) in 2020. The increase was even more marked for fund launches, which attracted $389 billion – an increase of 90% on the previous year, according to Shanghai-based consultancy Z-Ben Advisors.
European fund managers may wonder what could be done to replicate this success. Some of it is of course down to the size of the Chinese market, which is predicted to be worth more than $16 trillion by 2030, according to a UBS forecast.
But there are other technology-related factors – from the use of social media to automated distribution – which European firms could more easily adopt.
Tech factors
European interest in China’s mutual funds market has been high ever since the Yu’e Bao fund, which is 51% owned by e-commerce giant Ant Financial, became the world’s largest money market fund in 2017. By March 2018 it had $268 billion in assets under management (AuM), representing more than a quarter of China’s money market fund sector, according to data firm Wind.
Much of the fund’s success has been ascribed to its distribution and subscription process. It is accessible as an additional app on Ant’s Alipay payments platform, which has more than a billion users a year. They can choose to invest some of their excess money in the fund, hence the name, which translates as “hidden treasure”.
The Yu’e Bao fund has lost some of its AuM since 2018. By March 2020, it had fallen to $178 billion. The platform has also evolved from the original fund, managed by Tianhong Asset Management, to the point where it now houses other third-party funds, including two funds managed by a joint venture involving Invesco.
Casting a wide net
The distribution reach of the Alipay platform is a key draw for global firms, as evidenced by Vanguard’s recent decision to suspend its plan to launch its own onshore mutual fund business in China and instead rely on its existing joint venture with Ant Financial.
But while the distribution and subscription process plays an important role in the onshore Chinese funds market, so does marketing, says Harry Handley, an associate at Z-Ben. “There is very aggressive marketing of these funds both to existing customers and new customers,” he says.
This has intensified during the pandemic. Several funds have taken to live-streaming events on their Alipay apps and social media platforms, with portfolio managers then taking Q&As from viewers. “It is the equivalent of an online roadshow,” says Handley.
The self-promotion has also increased as more investors turn to actively managed funds, according to Leo Chen, managing director and head of Asia for Calastone, the funds distribution network. This has created a near-pop-star status for some fund managers.
“You now have some of the most popular TV shows in the country inviting fund managers on to talk about managed funds,” he says.
This led the industry’s trade body, the Asset Management Association of China (Amac), to call for caution from fund managers when it comes to entertainment-related activity.
This warning comes at a time when the market is beginning to slow down. For example, the E Fund Blue-chip Collection, run by one of China’s star fund managers, Zhang Kun, who goes by the nickname “mutual fund big brother”, has seen a record withdrawal rate in recent weeks – 22.48% compared to its most recent highs in late January. This follows a stellar 2020 in which the fund returned 95%.
There is a natural consequence of such aggressive marketing: a much higher churn as investors move to the next big fund in a matter of months. “There are big subscriptions when the fund launches but then six months later, investors move on,” says Chen.
Z-Ben estimates that between 20-30% of the cash raised by active equity funds on launch is then redeemed within six months. “Investors may pile into the latest high-profile fund but then pull out and invest in the next big fund. There is so much more churn,” says Handley.
A contrasting landscape
It is a far cry from the fate of fund launches in Europe, where there is generally less investor interest without a three-year track record. Consequently, Handley thinks it is unlikely that European managers will be able to replicate these Chinese funds in their domestic markets.
“Chinese fund managers are much more aggressive in their marketing and regulations are still being formed. There are things that European firms could not get away with in terms of performance presentation, data privacy and other compliance issues,” he says.
Such a move would also require a drastic change in branding for many firms, away from the staid image of pinstriped money managers to a brand boosted by social media presence and personal branding. Also, more marketing based on individual fund managers rather than the company itself.
This will be especially important for the increasing number of global firms looking for access to the onshore China market by setting up wholly foreign-owned enterprises (WFOEs) and seeking mutual fund licences.
To be successful in China, they will have to adopt the marketing and distribution practices of the incumbent firms, putting their funds on to popular distribution platforms and promoting them with live-streaming events and other social media campaigns.
To replicate this in Europe, though, would require a more flexible regulatory environment, around data privacy and performance statistics.
Nevertheless, says Chen, there are lessons that can be learned by firms outside of China in terms of better and more frequent marketing content and engaging with clients.
“We have seen some of the superfunds in Australia use short videos in simple English to explain products to investors. They are taking an educational approach and moving away from the idea of managed accounts as black boxes,” he adds.
Legacy issues
When observers point to the success of China’s big money market funds, it is often seen as a warning for fund managers about the danger of disruption. The scenario of Amazon starting its own mutual fund is typically suggested. However, it is not the fund managers that are in danger of disruption, but the distribution process, according to Chen.
“The e-commerce firms do not want to become fund managers. They just want to add new products, like managed funds, on to their platforms,” he says. He points to the example of Grab, an online taxi app in Singapore, which is teaming up with fund managers to offer wealth and asset management services.
“It is another example of new operating models for fund management that take their lead from e-commerce and social media rather than private banking and traditional marketing,” says Chen.
The other big impediment for European fund managers looking to replicate the Chinese mutual funds market is technology infrastructure – particularly in terms of distribution. It is not just the use of social media and e-commerce that is different, it is also the level of automation in the distribution and processing of fund orders.
“In Europe and the UK, distributors are aggregating orders, but in China, it is one-to-one and everything is automated. The industry is younger and the technology is newer, there is no legacy infrastructure and no faxes so the orders can be automated,” says Chen.
This difference was exposed in the establishment of the Mutual Recognition of Funds (MRF) scheme between Hong Kong and mainland China. When it came to connecting the two markets, Hong Kong wanted to aggregate the orders, but China wanted to issue them on a one-to-one basis. China relented and the immediate problem was solved.
A longer-term problem emerged, however. The size of the Chinese market, with different time zones, combined with the time taken to aggregate orders, meant that some orders were not coming in until 10pm, meaning that fund managers had to employ processing teams to work through the night.
As the MRF scheme opens up fully, the need for full automation as a long-term solution will only become more apparent, says Chen.
It will also possibly become more apparent to European fund managers that all the focus on front-end via social media marketing and e-commerce platforms will have a limited value without some attention on the back-office technology behind it all.
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