Mutual fund firms reach deeper into China's capital market

Foreign financial institutions tap potential in A-shares, better biz environment, high-quality talent, further opening-up

For the first time since 2021, Rajeev Mittal, managing director of Fidelity International Asia-Pacific (ex-Japan), flew to China in mid-February. The primary reason for this trip was simple — to attend the opening ceremony of the asset manager's wholly foreign-owned enterprise FIL Fund Management (China) Co Ltd in Shanghai, which had just obtained a mutual fund license from the China Securities Regulatory Commission in early December.

For Mittal, the importance of the Chinese market to Fidelity's global network prompted this trip, which was made shortly after China optimized its COVID-19 prevention and control measures.

Fidelity is known for its large number of legendary portfolio managers such as Anthony Bolton. Its portfolio manager academy program, which mentors an analyst into a manager within eight to 10 years, is highly celebrated among candidates.

Thus, Fidelity started its talent preparation in China as early as 2011.Over the past two years, the headcount for its China mutual fund business has doubled to 120, setting up a complete corporate structure covering investment, marketing, sales, operations, information technology, communications and legal and compliance.

More efforts are being made as Fidelity is recruiting more sales and compliance talent. Meanwhile, the company expects to hire more stocks and credit analysts in China to enhance its investment and research capabilities in China, said Helen Huang, managing director of Fidelity International China.

China, especially Shanghai, is equipped with a large number of financial talent with international vision and insights into the Chinese market, said Huang.

As Huang understands, the establishment of the mutual fund business marks a major step forward for Fidelity, which first tapped the Chinese mainland market in 2004. Over time, it has set up offices in Shanghai, Dalian and Beijing, hiring more than 1,900 employees.

The step-by-step progress in terms of talent preparation at Fidelity is in line with the observation from Michael Page, a world-leading headhunting firm.

According to Lily Liu, regional director for MP in Beijing, legal and compliance candidates are the first step that most asset managers take in China so they can apply for business licenses. Sales positions are the second major category to fill for foreign firms to land local clients, she said.

Based on MP's observations, foreign asset management firms have been increasing their headcounts in China, though this may be regarded as a baby step since central regulators announced in July 2019 to relax the policy on foreign ownership of mutual fund companies.

"Excitement regarding the entry of more foreign mutual fund companies can be felt in the job market. On the one hand, the base salary provided by foreign firms is more attractive, but more importantly, the long-term development, corporate culture and simpler work model brought in by foreign firms are conducive to the maturity of China's overall financial sector," Liu said.

Mid- to high-level management candidates are the most pursued by foreign mutual fund companies for the time being. Meanwhile, these companies are now highly localized, with expatriates accounting for no more than 10 percent of their total headcount, she said.

Neuberger Berman, a New York-based asset management firm, was among the first to apply for a mutual fund license in China in April 2020.According to the company's management team, it has been hiring new talent over the past few years. Talent with foreground, middle platform and background expertise are all needed, they said.

Ever since the limit on foreign ownership in mutual fund companies was officially removed in April 2020, a total of eight foreign asset managers have obtained approval to set up wholly foreign-owned mutual fund firms in China. New York-based asset manager AllianceBernstein was the most recent firm to get the green light on March 3.

For those already established, they have consolidated their presence in China by releasing a variety of products.

The world's largest asset manager BlackRock, with assets under management of $8.6 trillion by the end of 2022, applied for a mutual fund license in China in April 2020. It has been the most active in terms of product issuance in China, with four products and a fifth in the pipeline.

Lu Wenjie, BlackRock's China investment strategist, explained that it is important to seize opportunities generated by China's new economic drivers as the country deepens its economic and industrial upgrading and restructuring.

Neuberger Berman launched its first fixed-income product on March 21, raising more than 4.09 billion yuan ($593.98 million), and is preparing actively managed equity products. Fidelity also issued a six-month equity product on April 3.

For these foreign firms, profitability is one reason for their deeper reach into China, especially this year when the global market is confronted with mounting complexities, such as the banking credit crisis in overseas markets, soaring inflation in Europe, high interest rates in the US and the prolonged geopolitical conflict between Russia and Ukraine.

Therefore, NB experts said they want to bring "stable" experiences with bond products to win the trust of their very first clients in China.

The inflection point for US inflation is at the end of the tunnel. Combined with the optimized contagion control policies and supportive policies for China's property market, the macroeconomic elements suppressing the A-share market have been subsiding, which will help to introduce more capital inflow, said NB experts.

Long-term benefits can be expected from the A-share market, according to NB experts. The implementation of the registration-based initial public offering mechanism throughout the A-share market, together with stricter delisting rules, will further improve the quality of A-share companies and an upgrade of the asset management industry can be anticipated. This is also a major reason for foreign institutions to map the A-share market, they said.

As China advances its two-way opening-up in the capital market, foreign mutual fund companies and asset managers can bring more experiences in terms of business models, investment ideas, governance structure, value, system building and fintech development. The efficiency of asset allocation will be improved and more products will be provided, benefiting the vast majority of investors, added NB experts.

On Feb 3, Morgan Stanley Investment Management announced that it had received approval from the China Securities Regulatory Commission, the country's top securities watchdog, to take a full controlling stake in its joint venture Morgan Stanley Huaxin Funds, indicating that the New York-based firm will start its wholly foreign-owned mutual fund business in China.

China's high levels of wealth creation, growing demand for financial advice and the launch of a private pension scheme all point to long-term opportunities in China's asset management industry, said Gokul Laroia, CEO of Morgan Stanley Asia.

As understood by Huang of Fidelity, the global exposure to China assets, whether stocks or fixed-income investments "is far from enough".

"The weighting of China's assets among global asset allocation will be gradually on par with China's global economic status. The investment potential in China is thus enormous," she said.

"For us, the question is never about whether China is worth investing in, but rather how to optimize investors' exposure to China. It is always about seeking opportunities alongside China's growth trajectory amid the global geopolitical complexities," she added.