The world of mutual fund distribution in China has advanced another step with the recent licensing of TX Investment Consulting to sell third-party funds. Until now, only commercial banks, securities companies and mutual fund companies have been allowed to sell mutual funds. But the current arrangement has led to a problematic bottleneck, as the banks, in particular the big four state-owned ones, have dominated distribution. The number of fund companies now exceeds the number of fund launches the banks are capable of supporting.
Distribution among banks is in fact likely to be reduced, now that banks are beginning the process of establishing proprietary fund management units. This means up to 25% of the current distribution pipeline will go in the future to banks' affiliate fund managers, leaving the existing independent fund houses out in the cold.
Beijing-based TX Investment Consulting, founded by a former executive director at the China Securities Regulatory Commission (CSRC) named Lin Yixiang, already provides independent research on the funds industry, including fund ratings, to institutional investors.
Now that TX has been granted permission to sell third-party funds, Lin says he will approach his institutional clients and gradually develop a nationwide network of institutional contacts. TX also has an office in Shanghai.
Lin says he is in preliminary discussions with multiple fund management companies about selling their products. He says fund companies are receptive to the idea, although he won't say when he'll actually make his first sale. "We prefer to think before we do," he says. Lin declined to provide details about possible fees and charges.
Recognizing that building a national distribution system is going to be expensive, Lin says he is open to talks from potential investors interested in supporting his initiative with capital, although he has not yet made any approaches.
He is confident, however, that he can compete with commercial banks, which, he says, lack research capabilities about the funds industry. And he says TX will have an edge over fund management companies' own direct sales efforts because it is independent. Initially he will include a wide range of fund products on his platform, although in the future he may narrow the range toward more of a multi-manager approach.
Lin applied for this license in late 2000 because he felt the existing bank and securities company distributors, all state-owned, weren't competitive enough, and neglected continuous sales of existing products in favour of an unsustainable focus on flogging new fund launches. While securities companies have recently proven their ability to sell funds, Lin says they do so only when given egregious trading promises by fund houses.
For an in-depth look at changing distribution in China, see the upcoming October/November edition of AsianInvestor magazine.