JF updates Huaan relationship in PRC

FinanceAsia: How long has this relationship been going on?

Blair Pickerell: We have been trolling for partners in China for six years. The first domestic fund management companies were only established three years ago. We eventually settled on Huaan Fund Management, partly because we felt it was the best one, but more importantly because we felt they had a culture similar to ours. We signed a technical cooperation agreement with them last August.

We have been assisting them but what's also helped this relationship is that the authorities have a good impression of Huaan's management. Huaan was the first fund company given permission to launch an open-ended mutual fund, so this has made this relationship a live case for us. Without developing an open-ended fund, our technical cooperation would be limited. So this has been a good test for our relationship, a real project. The technical cooperation agreement was originally for one year, so last week we extended it, and we also agreed we wanted to get married. We signed a memorandum of understanding, sort of like moving from going steady to getting engaged.

What about the culture of Huaan appealed to you?

They have a real dedication to professionalism, a hard-ethic and a similar go-go attitude to us. They have a real esprit de corps. Also, they emphasize bottom-up research capability, like us. In all my years at Jardines, with all of its joint ventures, I've found that chemistry is more important than theoretical synergies.

What do you think made you appealing to Huaan?

Most other Western fund management companies have unit trust fund accounting done in Europe. We are one of the few that do everything here, which has a local integrated system. Others tend to market their offshore funds to Asia but do the back office processing elsewhere.

JF has always had to do processing here. We have created our own full range of systems in Hong Kong. We set up our Taiwan office 16 years ago; we were the only foreigners there until two years ago. Taiwanese law says we must do all accounting and administration on shore, and in Chinese. So we are a full-range mutual fund house in Asia, in the Chinese language. That has given us a big leg up in China, and a lot for Huaan to look at. We can see all the mistakes and problems they have in an Asian context, particularly regarding back-office controls and risks.

Huaan is readying a so-called insurance fund to run money for Ping An Life Insurance, pending regulatory approval. Have you been assisting them with this project?

I don't know a lot about it. It has been mentioned in passing. There are a lot of developments, including what to do about the grey market, about insurance companies, and discussions how to deal with that.

About pension money; I've seen estimates of the grey market for fund management in China being RMB700 billion -- that's about 10 times the size of the fund management industry. It's a potential time bomb, and the government needs to create a legal outlet, but they can't just suddenly say, 'okay it's legal now'.

We discuss these things with Huaan but right now the first priority is to launch open-ended mutual funds.

When will Huaan launch the first one?

One last major systems test needs to happen, and we still need to get Beijing to approve a few things. We all expect oversubscription so we need ways to determine a fair and equitable way to allocate shares, and not create a Tom.com-type of situation.

There is a lot going on in terms of education. Huaan doesn't need to spend money on marketing, so it is putting resources into getting people to understand that this is not like an IPO they should flip, and that the value of mutual funds can go down.

How will it be initially distributed?

There will be a three-month, no-redemption period. Distribution will primarily be through the Bank of Communications, through 200 branches in 13 cities. Huaan will also sell directly to institutional clients. There will be a 1.5% front-end load, which will be only 1.2% for larger institutions.

Is there a way for Huaan to leverage off existing systems at the stock exchanges?

This was discussed regarding allocation but it would force major IT changes at the Shanghai Stock Exchange and at all the securities companies, so the idea has been dropped. In the long term it won't be an issue.

How ready is Bank of Communications?

I really can't answer how ready they are.

To what degree is your relationship with Huaan also part of a broader relationship for JPMorgan in China?

JPMorgan is very supportive of Huaan and of us, because we explain to them how important Huaan is to JF Funds.