An evolving landscape
Investors in China, caught off guard by the property crisis in the world’s second largest economy, have been shifting into less risky mutual funds and are likely to continue pulling out of equity funds this year. However, some are looking to thematic funds and exchange-traded funds to take advantage of a rebound in individual sectors.
The Asset Management Association of China (AMAC) estimates that the market slump triggered by debt defaults of property developers wiped out 10.4% of the assets of mixed asset funds last year.
Ivan Shi, a director of Shanghai-based investment consulting firm Z-Ben Advisors, expects new fundraising activities to remain weak and investors to stay cautious on domestic stocks this year, with net outflows likely to continue, especially from active equity funds. Investors are seen to favour low-risk products, including money market funds, passive equity and fixed income funds.
Passive bond funds are also becoming popular. Shi attributes this primarily to the implementation of a new bank capital regulation that aims to boost market confidence in corporate lending.
The regulation, which took effect on January 1, imposes higher capital requirements for top lenders in order to bring the banking system in line with the latest international standards set by the Basel Committee on Banking Supervision.
ETFs have also been less affected by the stock market decline. Figures from the Shanghai and Shenzhen stock exchanges show that China ETF assets grew 18.06% year-on-year to 2.05 trillion RMB (US$284.7 billion) in 2023.
According to Shi, Chinese investors are keen on thematic ETFs, using the funds to bottom fish in individual sectors.
“The robust growth in ETF AUM has also led to the development of an increasing variety of products across sectors and themes, offering more detailed categorisation for investors,” he says.
There were 486 sector and thematic ETFs with 586.8 billion RMB of combined assets at the end of 2023, up 21.8% from 481.7 billion RMB in 2022.
Sustainability funds
Rachel Wang, director of manager research, China at Morningstar, has observed a significant increase in the assets of sustainability-themed over the last three years, underscored by a 54.75% surge in the CSI New Energy Index and a 44.52% jump in the CSI New Energy Vehicle Index in 2021.
The surge of interest and government incentives has prompted investors to allocate more to sustainability-themed funds tracking new energy and electric vehicles.
Funds tracking green economy sectors also managed to attract stable net inflows through Covid-19 and the property crisis, highlighting growing investor awareness as well as policy support. Government initiatives, including an ESG reporting framework for enterprises and green trust guidelines for trustees, enable investors to allocate more to environmental, social and governance funds.
As of June 2023, there were 197 sustainability-themed funds in China with 282.7 billion RMB of total assets.
These funds account for more than 80% of green fund assets. Wang points to renewable energy, electric vehicles, and environmental protection as the major focus for investors within the sustainability-themed fund universe.
According to Justin Christopher, managing director and head of Asia at fund service provider Calastone, the investment trend in ESG funds in China remains strong compared to the global market, where growth has run out of steam recently.
There were $51.3 billion of net inflows into ESG equity funds globally from 2020 to 2022. But a backlash against greenwashing and accusations of vague classification criteria led to a $10.2 billion outflow last year.
“As investors quickly become more informed and demanding of the products they invest in, fund managers will need to work harder to prove their value and differentiate themselves,” Christopher says.
Less concentrated
According to Shi, the mutual fund industry landscape in China has become more diversified in terms of participants, and less dominated by top players.
The market share of the top 20 fund managers has dropped around 7% over the past five years whereas that of mid-tier managers ranked up to 60th position climbed more than 2%.
“This trend suggests that market concentration isn’t as strong as presumed, offering opportunities for new and emerging managers to enter the market and improve their standings,” Shi says.
Two years ago, the China Securities Regulatory Commission unveiled guidelines to encourage “high quality” financial institutions, including commercial banks, insurance companies and securities houses, to actively participate in the mutual fund businesses.
Wang believes this can help enhance wealth management services and improve quality for the asset management industry. “Both traditional asset managers and emerging players can strategically leverage their core capabilities and talent advantages,” she says.
Shi expects asset managers with insurance and banking backgrounds to stay focused on bond and institutional businesses, where they are strong. But he says they will have to keep strengthening their management teams, products and distribution channels to compete head-to-head with traditional fund houses.
According to AMAC figures, there are 146 registered asset managers in China, including 12 investment arms of securities firms and a subsidiary of one insurance company.