Legg Mason, Citibank team to offer funds to Chinese investors

Legg Mason Inc. has partnered with Citibank (China) Co. Ltd. to launch mutual funds designed for retail investors in China.
FEB 11, 2008
Legg Mason Inc. has partnered with Citibank (China) Co. Ltd. to launch mutual funds designed for retail investors in China. The partnership allows the firms to participate in a market that is estimated to increase assets under management by 24% a year for the next 10 years, according to a report from McKinsey & Co., a management consulting firm based in New York. The mutual fund market is the fastest-growing segment of financial services in China. "[The Chinese market] provides significant opportunity," said Terence Johnson, managing director of the international distribution for Legg Mason of Baltimore. "We are at the beginning of that trend." Total mutual fund assets in China were $156 million in 2007 and are expected to grow to $1.4 trillion by 2016, according to McKinsey. If the estimated growth materializes, it would come on the heels of 60% annual asset growth during the past three years. The mutual fund offerings from Citibank and Legg Mason will include a large-cap-value fund, a small-cap and micro-cap fund, a regional equity fund, a global equity fund, a global multistrategy fund and a global high-yield-bond fund.

EMERGING MARKET

There is greater interest in expanding to China and other fast-growing markets because established markets are growing slowly, said Andrew Richards, fund analyst at Morningstar Inc of Chicago. The United States, for instance, "is an extremely competitive market. It's saturated," Mr. Richards said. It is too soon, however, to know whether mutual fund companies will make money in China, because the Chinese government only began allowing investors to buy offshore stock-related products in May, Mr. Richards said. Before that, choices were limited to fixed-income and money market products. Under the qualified domestic institutional investor program, mutual funds are sold exclusively through partnerships with local banks, securities firms or fund managers. For instance, Citibank was among the first banks to launch mutual funds since the regulation was expanded. It is working in partnership with BlackRock Merrill Lynch Investments of New York and Schroder Investment Management Ltd. of London. Also, China Southern Fund Management Co. Ltd. of Shenzhen teamed with Bank of New York Mellon Corp. as the overseas adviser to launch the China Southern Global Selective Fund in September. Other partnerships include the China Asset Management Co. Ltd. of Beijing and T. Rowe Price Group Inc. of Baltimore; Harvest Asset Management of Beijing and DWS Investments, the asset management arm of Deutsche Bank AG of Frankfurt, Germany; and China International Fund Management of Shanghai and JPMorgan Asset Management Holdings Inc. of New York. All these funds were oversubscribed, according to Daniel Enskat, managing director of global research at Strategic Insight Inc. in New York and a co-author of a report on Chinese investing. "There is definitely a strong interest on the investor side," he said.The Chinese investor is looking for geographic diversity, said Anand Selva, executive vice president, Citibank (China), which is based in Shanghai. "The Chinese want to invest in Brazil and other emerging markets," he said. "We will probably bring in one or two other managers in the next few months." But, the main obstacle to new funds is profitability and investment habits. "A more difficult component is to educate investors about fund investing and not just trading," Mr. Enskat said. "Chinese investors have extremely short holding period." Assets are flowing in quickly, and it is costly to support, he said. "You need marketing materials in different languages," Mr. Enskat said. "In the beginning, you have to invest a lot." Another unknown is regulatory changes that might be made. At times, the Chinese government has put a hold on qualified domestic institutional investor approvals, he said. Despite the regulatory challenges, glimpses of a robust market have emerged. In November, for the first time ever, China surpassed Japan in net flows to long-term mutual funds. "Japan used to be half of the Asian market," Mr. Enskat said. Some of the net flows reflect investors who see an opportunity to improve performance, but others just want to participate in the global marketplace, said Avi Nachmany, director of research at Strategic Insight. Sue Asci can be reached at [email protected].

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