Capturing opportunities in the China onshore market

Hong Kong’s fund manager Value Partners Group aims to develop its Mainland investment subsidiary to be one of the top five wholly foreign owned asset managers in China.

Value Partners has developed a full-fledged wholly foreign-owned enterprise (WFOE) business over the past few years with a comprehensive product mix. Its efforts are recognised by Asia Asset Management’s 2021 Best of the Best awards for Best WFOE House, China.

The WFOE market is one of the fastest growing areas within China’s asset management industry.

Beijing introduced the WFOE designation in the late 2000s, which initially allowed international fund managers’ local units to operate as an investment advisory. The restriction was loosened in 2016 to allow the entities to sell private funds to wealthy individuals once in receipt of the private fund manager (PFM) licence from the Asset Management Association of China (AMAC).

Value Partners is amongst the first batch of overseas managers to enter the WFOE market. Value Partners’ first WFOE business was established in 2011.

Since then, Value Partners has rolled out 12 PFM and one PFM investment advisory mandates. Value Partners’ China onshore business managed US$1.4 billion of assets as of the end of 2020.

Value Partners has been active in growing its WFOE business with the launch of three onshore equity funds in 2020, according to William Zhong, Co-Head of China Business of Value Partners.

“WFOE is one of the focal points for Value Partners’ China business. We’re very positive on its growth potential in light of Mainland individuals’ growing asset allocation demand,” Zhong says in an interview with AAM.

He notes PFM funds are “taking roots” in Chinese high-net-worth-individual communities as the funds’ design and strategies are more aligned with wealthy people’s investment objectives.

For example, PFM funds can generally deliver sound risk-adjusted returns in the long-term run with a longer-term strategic investment plan and better control in NAV drawdown.

Moreover, more Mainland investors are looking at WFOE products in view of the fact that the availability of high yield investment solutions is very limited in China.

Zhong estimates that Mainland residents now sit on total assets of over 100 trillion RMB, but a significant share of the capital are allocated to wealth management products or money market funds, which generally generate mediocre returns.

Traditionally, yield-seeking investors prefer to put their money into three investment categories, namely property, real estate-linked trust products and equities. However, the former two face headwinds to capture new funding as Beijing takes steps to curb property bank loans in a move to tame runaway house prices.

Zhong believes the regulatory tightening measure will drive investors to reallocate more to equities and fixed income assets, but investors may find bonds relatively less attractive with their low annualised average returns.

“Thus, equities will continue to be the focus for our WFOE product strategy,” Zhong adds. “We’re seeking to further diversify our equity fund line-up. For example, we may include hedging and tactical asset allocation characteristics in our products.”

Industry competition

In recent years, the WFOE industry landscape has become increasingly competitive with 98 PFM funds available in the market, plus more international players wanting to jump onto the WFOE bandwagon.

But Zhong is confident of Value Partners’ ability to stand out from its rivals.

“Although many Chinese investors favour international brands, we believe fund managers with long-term track records in investing and operating in China such as ourselves can generate stable long-term performance for our customers. This is very important, particularly in the highly volatile A-share market,” he says.

“Also, Value Partners has developed a presence in mainland China since 2009. Our on-the-ground investment teams and local investment expertise give us our competitive edge,” Zhong says.

He also emphasises that Value Partners is well positioned to provide inbound and outbound investment advisory services for international and domestic investors given its competent A-share and Asian equities research capabilities.

In late 2019, Beijing unveiled an initiative that allows WFOEs to enter into the mutual fund market. Zhong describes this market as an opportunity for Value Partners, although the company will face head-to-head competition with local fund managers.

“Our domestic rivals are very strong and experienced, but it doesn’t mean WFOEs can’t vie for market share,” he adds. “The mutual fund market capacity is huge, so we may take the first step by developing the funds that we’re good at.”

According to figures from AMAC, China’s mutual fund market had total assets of 20 trillion RMB (US$3 trillion) as of December 2020.