ôThe regulators have been saying this for the past five years,ö says one Shenzhen-based executive, ôbut this year they seem serious. The government has an incentive to do it.ö
He notes that the domestic funds industry has run out of new ideas and discretionary accounts will let it create a new business opportunity. There are now 52 licensed players, nearly all of which are struggling to make a profit or retain meaningful assets after new fund launches. The A-share market has had a good run so far this year but after a four-year decline, it will take longer to convince local investors that the equity story is for real.
Managing discretionary accounts is seen as the most immediate growth opportunity for Chinese fund houses, along with enterprise annuities and managing funds invested overseas. But enterprise annuities û ChinaÆs version of corporate defined-contribution plans û will be slow to take off, as the tax and other regulatory details remain obscure, while offshore funds (the QDII, or qualified domestic institutional investor, programme) will remain limited in scope once it formally begins later this year.
The China Securities Regulatory Commission and other regulators have long understood the need to introduce discretionary accounts. A pilot programme has been in place through the National Council for Social Security Fund, which has given out heaps of domestic mandates on a discretionary basis.
But the government has also been concerned that the fund houses would get carried away: securities companies have long been able to offer discretionary accounts for corporations, and wooed business with extravagant guarantees that have since blown up in the faces of firms such as China Southern Securities.
ôBut punishments for fund management companies would be greater,ö suggests Zhan Long, deputy general manager at China Merchants Fund Management, a joint venture between China Merchants Securities and ING Investment Management. ôWe would be put out of business. So we wonÆt be able to offer any guarantees without a third-party guarantor; our capital base is too small.ö
Fund managers have long argued that they should be able to do discretionary business because they are better managed and better regulated than securities companies, most of which are now insolvent.
Although managing institutionsÆ money on an accounts basis creates a new business opportunity, it would come with short-term pain, as the fees would probably be half of what fund managers now charge institutions investing in their pooled funds. Most likely this would put added pressure on many of the newer, smaller fund houses and eventually lead to consolidation.
ôThe big firms will get bigger,ö says Keith Li, director of market development at Boshi Fund Management, one of the leading independent houses. He says the draft regulations for discretionary accounts suggest that most firms will be allowed to compete in this area once it is opened, but clients will gravitate toward those firms with the best team, investment process and track record.
Institutions wonÆt automatically bolt for discretionary accounts, though, despite the advantages of having a tailored portfolio. ôRetail mutual funds charge higher fees,ö says Li, ôbut they are also more liquid and more flexible.ö
Fund executives say the draft rules suggest investors must provide three monthsÆ advance warning before withdrawing funds from discretionary accounts, in order to prevent them from using these to time the markets.
But discretionary accounts should prove a big hit. Institutions have been burned by the promises of securities firms but still want guaranteed accounts. Fund managers can also offer accounts in niche themes such as sector funds that would be hard to launch to the general retail market. Accounts are also more likely than retail funds to be allowed to utilise derivatives, once the government lets financial providers use these.
Frank Yao, CIO at Huaan Fund Management in Shanghai, adds that life insurance companies may be keen to use discretionary accounts to develop lifecycle products or other tools to better match their liabilities. ôThe big financial institutions want customised accounts,ö he says.