China’s mutual funds industry will be swelled by accelerating inbound investment into actively-managed products over the coming 24 months, according to Funds Europe’s China Investor Survey 2020 conducted in partnership with Standard Chartered.
There will also be a more modest rise in cross-border flows into China-domiciled passive investments, specifically index trackers and ETFs, over this timeframe.
This point is confirmed by the survey results, where 38% of respondents say that actively-managed fund products are central to their investment strategies in China (fig 1).
However, this figure will rise to 63% in two years’ time, with respondents predicting a surge in the importance of actively-managed fund products for foreign investors (fig 2).
Simon Kellaway, regional head of Greater China and North Asia financing and securities services at Standard Chartered, said: “As China’s trade surplus gradually narrows and the vertiginous rates of growth delivered by some Chinese companies revert to more moderate levels, the opportunities for asset managers that are skilled at stock picking will become increasingly important.”
One asset manager told Funds Europe: “There is evidence of higher alpha in China versus other emerging markets, so it’s a strong market for active management where there is not a lot of institutionalised investment processes and therefore a good area to play from both a strategic and an active point of view.”
These survey results reflect China’s continuing growth to become the fifth-largest mutual fund market worldwide with assets in excess of $2 trillion (€1.65 trillion) as of August 2020. Money market funds account for roughly half of China’s mutual fund assets, with retail investors accounting for approximately two-thirds of money market fund assets according to ICI Global data.
However, there is strong potential for retail investors to increase their holdings of risk assets in search of higher yield, particularly through a shift in allocation out of money market funds into actively-managed equity funds.
To date, passive investment products (index tracker funds, ETFs) have generated weak demand from Chinese domestic investors – where investment flows, as we have noted, have been channelled predominantly towards actively-managed funds and money market funds.
However, the survey indicates that a growing percentage of foreign investors (rising from 25% to 34%) will employ passive investment vehicles in their investment strategies in China over the coming 24 months.
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