Anbang Insurance Group has filled headlines with its daring acquisitions across financial services. The most recent deals have been to acquire foreign insurers but these follow a dramatic domestic expansion.
The company is now the largest shareholder in Minsheng Bank, holds stakes in Industrial and Commercial Bank of China, and is a shareholder in three other banks, six insurance companies, a financial leasing group, a property developer, and two fund management companies.
Managing publicly licensed mutual funds has become the centre of competition for insurers, trust companies, securities firms, banks, and other financial institutions.
Regulation, and therefore activity, has always been fragmented in China but various pressures have led companies into asset management and regulators are now catching up. Brokers facing insolvency sought to manage segregated accounts. Banks seeking fee income took stakes in fund companies. Trust companies evolved to sell high-yielding products. Insurance companies set up companies to manage their general accounts, and then expand.
Recently the China Securities Regulatory Commission has encouraged brokers, trust companies, insurers, and even unregulated private funds to apply for a mutual fund public license. It has also blocked securities firms from launching new collective investment schemes.
The authorities want to broaden the means of channelling finance to the private sector and are encouraging innovation. Many finance companies are adopting a conglomerate strategy. Their leaders envisage becoming China’s Blackrock and see managing assets as the ultimate expression of being a universal provider.
Others are driven by the fear of losing out to a competitor or of digital disruption.
Plenty of finance company chief executives are wondering how to compete against Tianhong Asset Management, which last year became China’s biggest fund house thanks to its money-market fund operating on the back of Alibaba’s payments arm.
Most of these forays into fund management will struggle, however, except where there is a scalable operation catering to a captive audience.
Mixed performance
Some bank- and insurance-linked fund managers have a proven track record in fixed income, such as ICBC’s funds joint venture with Credit Suisse.
But none of these tied groups have demonstrated consistent performance in managing equities, whereas the elite fund houses, such as China Asset Management, Harvest Fund Management and E-Fund, do. And no matter how slick the marketing, performance is performance.
Fund arms of larger financial groups will also face the same problems as peers worldwide: they serve the group, not their investors. They will have the same old struggle for resources and attention.
This virtual doubling in the number of China’s fund managers comes after a fallow period of terrible market performance between 2007 and the tail end of last year.
No one has invested in fund management for years. The industry lacks experienced investors, traders, chief operating officers, and salespeople. Newcomers may transfer existing staff to new fund management roles but many of these people will prove mismatched.
It’s no picnic for the traditional fund groups either, who need to figure out how to compete against exchange-traded funds, foreigners, private groups, and the siren call of high-yielding wealth-management products.
China needs all of this new competition to generate high-calibre investment groups. The country now boasts a massive domestic bond market but lacks the institutional anchor investors; fund investors are overwhelmingly retail. Nor is there a meaningful secondary market or the ability to generate a total return in fixed income.
The stock market, meanwhile, is boom and bust, and hedging tools are negligible. In addition, too many assets are stuck in real estate or in structured products that are perceived as guaranteed by the state.
But new competition implies that plenty of these would-be fund managers will fail. Opaque bailouts cannot be tolerated.
The CSRC has made it easy to get into fund management, and it should make it easy to exit too.
