Localization Key for Foreign Private Fund Managers’ Success in China

January 12, 2023 — Singapore

Foreign-owned private fund managers (PFMs) have increased their presence in China, but they face intense competition from their domestic counterparts

The growing size of China's wealth management sector, combined with the country's aggressive efforts to open its financial markets, present opportunities for foreign fund managers. However, foreign private fund managers (PFMs) will need to tackle a series of localization challenges to establish themselves in the Chinese market.

Since foreign PFM registrations were allowed in 2017, the number of wholly foreign-owned PFMs has increased to 242 as of November 2022, but there are significant differences between the growth of individual managers. Except for a few wholly foreign-owned PFMs with assets under management (AUM) of more than RMB1 billion (US$145.1 million), the rest are mostly micro-managers, with less than RMB500 million in AUM.

The number of wholly foreign-owned private registered funds has steadily grown. As of June 2022, 179 private securities investment funds were launched by wholly foreign-owned PFMs, compared with 165 at the end of 2021. Overall, fund products issued by foreign PFMs have flexible strategies across various categories. Products tend to be rich in themes, cover a comprehensive range of asset classes, and have competitive rates compared to their domestic counterparts. As many investment concepts and strategies have had a longer history of establishment in foreign markets, global firms can offer their experience in China, whether in terms of quantitative hedging, derivatives, funds of funds, or multi-asset allocation.

However, most foreign PFMs’ development in the crowded Chinese market has been relatively slow. Leading domestic PFMs trump their foreign counterparts in terms of performance, strategy iterations, and personalized services. In addition, compliance requirements for foreign asset managers are relatively strict, not only in terms of performance disclosure, but fewer windows are allowed for communication with investors, resulting in investors being largely unfamiliar with foreign products.

It takes time for domestic investors to accept and recognize foreign asset management firms’ investment concepts and strategies. Local investors are generally unfamiliar with investment strategies, as China’s capital markets were established fairly recently, and there are relatively little sample data on price limits, investor structure, and maturity of instruments. Thus, foreign managers will need to adapt by customizing their strategies to local requirements.

Cerulli believes that it is critical for foreign asset management firms to combine their international experience with the need for localization. “Foreign PFMs should build and optimize localized investment and research systems, select investment strategies that meet the needs of the local market, move toward diversified and globalized allocations, and meet the varied investment needs of customers,” said Joanne Peng, research analyst with Cerulli. “In addition to regular marketing efforts, foreign PFMs should promote their brands through digital means, for example, by launching official WeChat accounts, to increase their reach to high-net-worth individuals.”

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Note to editors

These findings and more are from The Cerulli Edge—China Edition, 4Q 2022 Issue.

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