Chinese fund firms set sights on Europe

Mainland fund managers are seeking to break into the European institutional market and sell the China growth story, although fears over market volatility both domestically and in Europe around Cyprus points to short-term fundraising difficulty.

Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry and partner for PwC’s Luxembourg Financial Services practice, says he noticed an uptick in Chinese managers seeking advice on breaking into Europe in the second half of 2012.

This apparent trend gained momentum after European Central Bank (ECB) president Mario Draghi announced last July that he would do “whatever it takes to save the euro” – a soothing balm on the fraught nerves of international investors.

Saluzzi noted that at the Asian Financial Forum in Hong Kong this January, “we met a number of Chinese asset managers and at least three or four of them expressed interest in launching products [for Europeans], so I think momentum is building”.

He concedes that the AUM of China-focused funds being sold into Europe’s professional market is still small. “We are not talking about hundreds of millions of euros,” adds Saluzzi. “It’s really just the beginning of the process.”

But with China’s GDP forecast to expand by an estimated 8% this year compared with 0.1% for the eurozone, the thinking is that institutional investors in Europe will increasingly target investment opportunities exposed to China.

Chinese asset managers say they are better placed than international managers to understand the mainland’s economic, political and cultural progression. As such, they say it gives them better insight into A-shares, as well as global companies that either have China operations or derive a portion of their revenues from the country.

“[They believe] the main market today [for select international firms] has become China, even though those companies are not Chinese,” Saluzzi suggests.

Italian shoemaker Tod’s, for example, says that sales in Greater China accounted for nearly 20% of its 2012 revenue.

For now, Saluzzi says Chinese fund houses are looking to tap interest among European institutions for exposure to renminbi-denominated assets and China stocks.

But amid continuing fallout over the messy Cyprus bailout, some question whether Chinese asset managers will scale back their European ambitions as fears over eurozone fragility resurface.

“If people start worrying about Cyprus’ problems, then [European investors] will adopt a wait-and-see attitude just as they did with Greece, Italy and Spain,” says Effie Vasilopoulos of law firm Sidley Austin.

“There was a European recovery for Chinese investments in the first half of last year and Chinese managers started to focus on what they could see as a growing demand for Chinese themed investments among European investors. But that trend has now [declined], and what I hear more recently is that fundraising in Europe has become much more difficult.”

Volatility in China’s equity market has also been in evidence. The CSI300 rallied over 30% to nearly 2,880 points from the start of this year to mid-February, but by close yesterday had dropped almost 6%.

European investors relying on renminbi appreciation may also be disappointed after central bank remarks at the recent National People’s Congress that the yuan was no longer significantly undervalued on the back of a 30% rise against the greenback since July 2005.

Brand recognition stands out as one major obstacle for Chinese asset managers gaining traction with European investors. Those that have established themselves in Hong Kong and can boast a track record are best placed to compete abroad.

There is a similar advantage for firms with Western joint-venture partners in China, on the understanding they can capitalise on their distribution network among institutional investors.

“It reminds me of the situation at the beginning of the 1990s when American fund managers started to develop their presence in Europe. For years they were stuck at a few hundred million in assets,” Saluzzi recalls.

However, data from Lipper FMI shows that two of the top three fund houses in Europe last year were US-based, namely Pimco with sales of €11.1 billion and BlackRock at €7.2 billion. France’s Axa came in second place at €8.4bn.

“I believe that Chinese fund managers will have to go through the same learning curve,” adds Saluzzi.