Given the pioneering nature of the fund management business
in China's large but unruly domestic stock markets, it seems
appropriate that the offices of Invesco Great Wall Fund
Management Company (IGT) are in the frontier town of Shenzhen,
just across the Shing Mun river from its salubrious neighbour,
The offices of IGT, one of the early entrants to the market,
certainly look the part. Aside from two huge toy bulls that
guard the reception area, each sporting Invesco Great Wall
rugby shirts, the remainder of the floor is given over to the
trading desks and computer screens one expects to see in any
serious fund management operation.
Amvescap, the parent company of Invesco Asia, is certainly
taking its China joint venture with local securities firm Great
Wall Securities seriously. Based in the US, Amvescap is one of
the world's largest independent fund managers, with assets
under management of more than $374 billion. IGT was established
in June 2003 following the relaxation of restrictions on the
ownership of domestic fund management companies by foreign
investors. A joint venture with capital of Rmb100 million
($12.1 million) and a staff of 50 already, the equity is shared
33% each between Invesco and Great Wall Securities, with two
additional domestic minority partners, Kailuan Group and Dalian
Shide Group, holding 17% each.
The beauty of the deal, according to chief investment
officer Patrick Shum, is that Invesco has management control
despite the shareholding structure. "Great Wall allows us to
have full management control of the company," he says. "It's a
gentlemen's agreement. There is also an understanding that both
Invesco and Great Wall will increase their stakes in the joint
That, says Shum, will come at the expense of the existing
minority holders and will result in Invesco and Great Wall each
holding 49% of the company. "We've already submitted for
approval of the increase," he says.
The move, once sanctioned by the Chinese authorities, will
leave Invesco in one of the strongest positions of any foreign
partner in a China fund management venture. "All the other
joint venture companies have local parties with 51% or more,"
says Shum, "and in terms of a 49% shareholding, there's only
one other firm ahead of us."
The point of all this jockeying for control is that Invesco
is able to direct its business much more strictly, claims Shum,
although he admits that there is always a fine line to be trod
with the authorities, which appear to differentiate between
management and voting control. "Management control is very
important," he says. "It's also what the Chinese government
wants: they want to transfer knowledge to the local market. But
the government still sees the securities market as strategic:
they don't want to lose control of it."
Of equal importance for Invesco, Shum claims, was the choice
of joint venture partner. In Great Wall Securities, Invesco
might not have found the largest Chinese securities firm, but
at least it found one that was solvent. "The majority of
securities companies and Itics [international trust and
investment corporations] are on the verge of bankruptcy," he
says. "The benefit of a good local partner is that it gives you
a good profile, even if you might not get full control."
That profile has helped IGT to raise sufficient capital from
what is mainly a retail market to provide assets under
management of approximately $400 million spread across four
funds: equities, balanced, bonds and domestic growth. It is a
respectable sum, but by no means the largest amount raised by a
foreign fund management venture (see box on following page).
Shum clearly finds seeking capital from China's retail market
"It's very competitive," he says. "And to get people
invested is very tough. A lot of people who make the decision
don't control the money. It's very easy to make the decision to
choose us from a performance basis, but it seems there are a
lot of non-performance-related issues. People are willing to
give whatever they can to get business. We can't afford to do
that: we'd tarnish the name of our partners."
What makes the fund raising that much more difficult is that
IGT does not get direct access to retail customers. "The major
clients are retail," says Shum, "but you can't sell to them
direct: China's just too big. So the big four banks are so
important to get access."
IGT has already established marketing agreements with two of
the big four banks, Bank of China and Agricultural Bank of
China, which also act as custodian and trustee banks, but the
agreements are not exclusive and the banks also distribute
investment products for IGT's competitors.
|The joint venture line-up
Invesco is by no means the only international fund
management firm to have signed up for a joint venture
with domestic institutions in China (see the
accompanying table). In fact, Invesco Great Wall Fund
Management is not even the largest fund.
Several existing businesses boast assets under
management of more than $1 billion, including joint
ventures such as those between Dutch bank ING and China
Merchant Securities, Dutch/Belgian asset manager Fortis
Investments and Haitong Securities, and France's
Société Générale and
Fortune Trust & Investment.
There are currently 12 fully operational
Sino-foreign fund management joint ventures. Recent
market entrants include UBS, which opened its China
joint venture with SDIC Hongtai Trust & Investment
by taking a 49% stake in UBS SDIC Fund Management in
April of this year, and Deutsche Bank, which signed a
joint venture agreement a month earlier with one of
China's largest domestic asset managers, Harvest Fund
Several deals are also rumoured to be in the
pipeline, including a joint venture between Schroders
and Bank of Communications and CSFB, Industrial
Commercial Bank of China and Cosco. Other deals are
already signed, but are still awaiting the approval of
China's Securities and Regulatory Commission, such as
the Commonwealth Bank of Australia's tie-up through its
First State Investments subsidiary with Hantong
Securities, and HSBC Investments' agreement with Shanxi
Trust & Investment Corp.
Despite the continued growth in the number of
Sino-foreign fund management companies starting up new
businesses in China, their total number is still only
under a quarter of the total of such companies -
combined market share is 21.8%, according to research
firm China Knowledge.
Sino-foreign fund management joint ventures
Operational or signed
|AIG Huatai Fund
International Fund Management
International Fund Management
International Trust & Investment Company
|DB Harvest Fund
Prumerica Fund Management
Templeton Sealand Fund Management
|FSI Hantong Fund
Haitong Securities, Huatai Securities, Shandong
ITIC, Shenyin Wanguo Securities
Allianz Fund Management
& Investment Corp
Wall Fund Management
|SYWG BNP Paribas
Trust & Investment
Sources: Company reports, Euromoney
research; KPMG; China Knowledge
Holding onto retail money is just as difficult as raising
it, largely because of the idiosyncrasies of China's retail
investors. "All our funds are open-ended," says Shum, "so
managing redemptions and subscriptions is our daily business.
The problem is the different culture in China. In Hong Kong or
other markets, when a client invests and you make money, they
tend to feel happy about it and stick with the manager. Here,
they'll feel happy but they often sell as well to lock in
profits. They've got used to the trading mentality of the 'A'
Equally perverse, says Shum, is the fact that losing money
as a fund manager sometimes works in your favour when it comes
to dealing with Chinese retail clients.
"Some funds have been very fortunate in raising huge sums,"
says Shum with evident envy, "even though they then lost money.
People in China don't like to lose money so, if you do lose
money for them, sure they'll shout at you, but they won't
redeem. Apart from being shouted at, that's quite an enviable
position to be in!"
If IGT's track record to date is any guide to the future,
Patrick Shum and his colleagues might not be shouted at a great
deal, but they are certainly likely to encounter more
redemptions from retail investors locking in profits. Although
the funds have been in existence for a relatively short time,
they have all comfortably outperformed their benchmark indices
Compared with a market that overall slid 16% in 2004 and has
already fallen another 10% in 2005, that is not a pedestrian
performance. The secret, claims Shum, is that there is no
"We have no tricks, no secret formula," Shum says. "It's
very simple: it's about net profits and the quality and
sustainability of earnings."
Invesco Great Wall Fund Management
China funds performance (as at March 31 2005)
NAV percentage growth
|* Twice bank
Source: Invesco Great Wall
By that he means that IGT is adopting solely a stock-picking
approach to investing in China's domestic stock markets.
Starting with a universe of nearly 1,400 stocks listed on
China's two stock markets, Shanghai and Shenzhen, IGT adopts a
strict filtering approach, looking for three kinds of
securities: growth stocks with sustainable revenues and
earnings, value stocks that show cyclical characteristics, and
income stocks that offer stable dividend growth and a
consistent payout ratio. That produces a potential investment
pool of some 300 securities, from which a monitoring list of
200 stocks is derived.
The final stock selections are made on the basis of detailed
data mining, analysis and company visits. "Information
availability is actually very efficient in China," says Shum.
"Before we visit a company we can know a lot of things already.
Of course the quality of information can be very different.
When we visit companies, we want to clarify their margins, the
source of growth. Plus we want to talk to the very top guy -
the CEO - to know how he manages the business."
One of the chief pitfalls of many Chinese companies is that
they diversify into business areas unrelated to a company's
core activities, simply to make more profits. Shum and his
colleagues would prefer to avoid companies that do this. "The
concept of opportunity cost is missing in China," says Shum.
"As long as they're making money, they're happy. If they see
someone making $1,000 from something, they'll copy it, even
though it means they'll make $500. We really need to educate
them on return on equity and return on investment."
Nevertheless, Shum says that he does come across a few
managers in China who grasp the concept, if not the
terminology. "We want to talk to these people," he says. "They
don't need to speak the [jargon]."
Once IGT finds these more enlightened managers, their
companies are simply added to the portfolio, which currently
comprises some 30 stocks. There is no trading of volatility
unlike in many more sophisticated equity markets - in fact,
quite the reverse. IGT deliberately looks for alpha, not beta
stocks, and its portfolio demonstrates a beta of less than 0.9,
providing a stable and consistent pattern of growth.
It is an old fashioned, traditional approach to investing
and with it, Shum claims, IGT is helping to dispel what he
calls the four myths about China's stock markets.
The first myth, he suggests, is that China's market is
overvalued. "People say there's no value [in the China
markets]," Shum says. "But when I construct my own spreadsheet
of around 200 stocks, I find it's not true. People didn't
notice, but 2004 was a very important year [for China's
markets]. There are still a lot of speculative stocks, but in
2004 the broad market earnings per share was up 35% while the
market fell 16%. At the end of 2004, when we calculated it, the
market was trading on roughly 16 times earnings and in 2005
earnings are growing 13%, which means that the 2005 prospective
price/earnings ratio is 14.5. The market has come down another
10% or so since, and price to book is 2.2 times. It's cheap:
no-one notices it, but it's cheaper than Hong Kong."
Not just Hong Kong either: in fact, the China markets are
rapidly realigning with global comparables.
The second myth about China's stock markets is that they are
purely speculative and dominated by stock manipulators. That's
not the case, says Shum, who points to a change in investor
perspective, as well as a continued shakeout of traders as
evidence that the markets are gradually institutionalizing.
"We [foreign fund managers] have started to look at
companies by fundamentals," he says. "The continued fall in the
markets has driven out some of the retail investors, and
speculators have gone bust. So the importance of speculation in
the markets is in fact reducing."
Room for growth
Because of the disastrous past performance of China's stock
markets, the investing public continues to view them as
hopeless cases that investors will avoid for years. That is
myth number three, Shum argues. "I often joke that the 'A'
share market that I'm investing in must be a different one to
the one I'm hearing about," he says, laughing. "People continue
to be very negative about the markets. It's a very different
outlook to our portfolio. Maybe we're living in two
To dispel the fourth myth, that there is too much supply and
too little demand in the markets, Shum cites some key
statistics. The market capitalization of China's two stock
markets is equivalent to just 30% of China's current GDP.
Compare that with the US ratio of 110% of GDP or Japan's 70% of
GDP and there is clearly room for growth.
Some of that growth will inevitably come from burgeoning
private savings, already $1.9 trillion, more than four times
the total market capitalization, as well as from equity mutual
funds, already some $30 billion and growing by between $3
billion and $6 billion every year, claims Shum.
In addition to the demand side of the equation continuing to
grow, the perceived supply-side problem, that of the
state-owned shares overhang that has depressed share prices for
years, might be about to be solved. In May, the government
announced proposals to start the gradual disposal of these
shares, although it will take many years to achieve this.
The combination of these four misconceptions about China's
equity markets has led to six-year lows and it all adds up to
what Shum calls the "China opportunity". Behind that, he says,
is the fact that "slowly, quietly, this speculative market is
moving towards a more institutional and fundamentals-driven
IGT's own challenge is to capitalize on its early good start
to seize the China opportunity. To do that, the firm will need
to raise a lot more than the $400 million it already manages,
as Shum admits. "Given the current situation, I have the
capacity to invest $1 billion," he says. "And there are still
enough companies to invest in. As stocks continue to come down,
the investment universe will expand. That's good for me."
But IGT will only be able to take full advantage of this if
it can raise more capital; and it will probably need to turn to
the institutional market to do that.
Unfortunately, IGT failed to secure a mandate to manage the
much sought after funds of the National China Social Security
"The bulk of institutional money will be coming from the
NCSSF," says Shum. "Last year we were on the final list of
eight, but they only chose four [firms]. We're not sure when
the NCSSF will next allocate funds."
In the meantime, IGT is relying on other sources of
institutional funds. "Invesco has applied for a $50 million
QFII [qualified foreign institutional investor] allocation,"
says Shum. "We'll have a big say in the investment of that.
We've already got approval to act as an investment adviser for
QFII. It's going to help the institutionalization of the
market. We're also beefing up our capital at the moment."
Shum adds: "We need Rmb100 million net capital to get a
licence to bid for the Enterprise Annuity Fund: it's a bit like
the MPF [Mandatory Pension Fund - Hong Kong's compulsory
retirement plan], although it's not mandatory."
Despite the fund-raising challenges ahead, Shum claims that
he will not be hurried in to growing his business. "We'd like
to turn our strong [investment] result into profitability and
larger funds under management," he says, "but I'm not in a
rush. We don't need to rush: we want to do it right. We have
the name and performance in the market. Now we'll start to talk
to the institutions: we're trying to do some more direct
Based on IGT's track record thus far, those institutions
would be well advised to listen. IGT has proved that there is
money to be made in China's volatile and unpredictable markets,
and the firm is well positioned to benefit from their gradual
deregulation. Its challenge now is to grow its funds under
management more aggressively in the next few years.
If it fails to do this, it might fall victim to the fate of
so many other pioneers that blaze a trail in new markets:
finding that latecomers come in and make the real money.
This article first appeared in the June edition of
Euromoney and Chris Leahy is the Asia Editor of