White-labelling tipped to gain favour in China

Difficulties in securing distribution in China ahead of the cross-border mutual recognition scheme going live may prompt asset managers to launch white-label products there, argued Christian Edelmann, head of Asia Pacific at consultancy Oliver Wyman.

While foreign managers are eyeing the Rmb100 trillion-plus ($16.3 trillion) of deposits in China, the country’s dominant four banks will dictate how products are distributed, he added.

There is a very limited set of truly sizeable distribution partners, noted Edelmann, and domestic banks probably have little interest in exclusive, long-term tie-ups with global asset managers.

This may be especially true for groups such as Bank of China that have their own asset management arms and want to avoid competition for their own funds.

Though some of these Chinese firms would not have the same range of product as foreign entrants, they could use their size to their advantage to dictate distribution terms. Also, global managers would not be able to draw on brand recognition as a selling point.

Moreover, despite the mainland's proliferation of online distribution channels, there are only a few such firms, such as Alipay, with sufficient scale to attract foreign managers.

With white-label products, foreign fund houses could bring their investment capabilities to China and allow their distributor partners to put their own brand name on the funds.

Though foreign fund houses have traditionally frowned on white-label products when tapping new markets, said Edelmann, there is increasing recognition that building a brand name in China is costly.

There are only five to 10 global managers who have the ability to build their brand in China, he argued. But specialist equity or fixed income managers would find it more difficult to do so and are therefore more likely to turn to white-label products, noted Edelmann.

This approach would be an alternative to joint ventures in China, which he said had disappointed some foreign partners, mainly because of unrealistic expectations. 

“Everyone gets excited, but they don’t see the challenges of executing these JVs,” he added. Those challenges include profitability, complex regulation, high compliance costs and differences in management culture, noted Edelmann.

It has been argued that such issues contributed to US firm BNY Mellon selling its China JV to Shanghai-based wealth manager Leadbank in May. State Street Global Advisors has also been looking to offload its 49% stake Zhongrong Trust, as reported.

Yet not all JVs end up in difficulty. Edelmann said JP Morgan First Capital Securities has benefited from the 33% stake the US bank holds in it.

Oliver Wyman expects assets managed by China’s fund industry to surge six-fold to Rmb24 trillion by 2020 from Rmb4 trillion last year, with two-thirds of that growth driven by retail investors.

Growth in institutional capital will be driven by the relaxation of investment constraints, the firm noted.

For example, in October 2012 China relaxed restrictions on overseas investment by domestic insurers, allowing investments in 45 countries and widening the range of permitted asset classes.

The country’s fund industry more than quadrupled its AUM to Rmb4 trillion by 2013 from Rmb900 billion in 2005. In the same period, the median size of mutual funds declined steadily to Rmb400 million from Rmb6.4 billion in 2007.

But this growth has not led to greater fortunes for the 90 domestic fund houses, of which more than a third were loss-making as of December 2013. This was due to many of them having sub-scale products, which has eaten away profits due to high fixed costs, said Edelmann.