| China offers big rewards – for now | |
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It was only three years ago that the big noise in Asia's mutual fund industry concerned the long-term plans to privatise Japan Post, the world's largest financial institution with some $3,000bn (�2,100bn, £1,500bn) in deposits and 25,000 branches. In October 2005 it began selling mutual funds, giving savers a choice between five different funds. Total sales in the first year reached Y360bn (�2.2bn, £1.5bn, $3.1bn) and this liberalisation of a significant part of Japanese household savings, combined with the expected retirement of a generation of baby boomers, positioned the Japanese fund management market as one of the most attractive globally. Indeed, the Japanese market has continued to offer promise for international fund managers as more and more household savings have been channelled to mutual funds, in particular those investing internationally. While the domestic stock market has offered little in performance, Asian regional and global stock markets have continued to deliver attractive relative returns at a time when the yen has continued to stay weak or stable. Often in the past a big barrier to overseas investment was the prospect of losing on the exchange rate as the yen strengthened from the end of the 1970s and through the 1980s. The spectacular performance of the Chinese and Indian stock markets has helped direct flows towards emerging markets.
In spite of the promise in Japan and some impressive growth statistics for the investment trust industry as a whole, it has been the development of China's fund management industry that has, of late, been dominating the headlines. The latest intentionally invested fund to be offered in China under the so-called Qualified Domestic Institutional Investor scheme gathered $14bn in subscriptions in the first day of sales. The successful company, China International Fund Management, had targeted an equivalent of $4bn, scaling back the offer to match the allocated quota. This fund launch is the fourth so far for fund managers in China. Allowing funds that invest internationally is viewed as providing a source of diversification away from the white-hot stock market in China, and perhaps a counter-weight in the argument to allow the Chinese renminbi to appreciate more quickly. Two more fund launches are expected over the next month and the securities companies and banks are also actively looking to promote products investing internationally. So far it has been the fund management companies that have recorded the biggest successes. As one fund manager expressed to me recently: "Fund managers are raising as much in a morning in a single fund in China as whole businesses have built over several years." The allure of quick wins in the mainland is attractive and attracting significant attention. Managing the volatility of flows once investors move beyond the initial lock-up period will present its own challenges. Alongside the immediate gains offered in China, managers can be forgiven for assuming that the Asian fund management growth story is all about China - it certainly is not. Although the early sales through Japan Post have been steady rather than meteoric when compared with developments in China, there are a number of factors causing significant change in the Japanese savings market. In September it was reported that household assets held in mutual funds increased nearly 40 per cent from a year earlier as more savings shifted away from bank deposits, representing 5 per cent of household assets, or almost Y78,000bn. At the end of June a number of the larger funds investing in international assets announced they would stop taking new investors in an attempt to manage capacity. A key factor driving optimism for the newly emerging wealth management segment of the market is the expected retirement of a generation of baby boomers. Typical lump sum payments are about an equivalent of $50,000 and the big providers have been positioning accordingly, introducing so-called separately managed accounts and working with international fund managers to provide the underlying expertise in global markets. Daiwa announced in October that it aims to sell $8.5bn of SMAs in the coming year and currently is the largest provider with a 35 per cent market share. In the past, fund managers suffered from large swings in assets as Japanese investors chased the latest trend or theme. This had a negative impact on performance and at different times tainted the view that investors had of international investing. A rapidly rising yen at times compounded this negative view. Today's developments appear structural and more sustainable as there is now a genuine and underlying need to diversify, driven by demographic factors. The services being introduced in Japan reflect this change in appetite and it is no coincidence that the distribution of investment products has now diversified away from being dominated by securities companies. China is at the very beginning of building experience in international investing. There are many similarities between its development and that which has occurred in Japan over the past 15-20 years - not least the prospect of a strongly appreciating currency. However, everything in China appears bigger and faster. Whether investors understand the principles of diversification or not remains a moot point. For now the focus is on feeding the frenzy. |
