How Shall China’s Large Financial Institutions pick their Overseas FoF Partner?
One of our clients and I have been doing research in the past one and half years on large Chinese financial institutions, particularly capital management institutions, on how to develop overseas fund of funds (FoF) products for their investors.
One obvious weakness of these institutions is their lack of knowledge on overseas FoF market. In order to develop FoF products, the institution should have capabilities in asset allocation strategy, category strategy and how to pick the right fund managers. All these require know-how that could only be accumulated through many years of operation. Working with an overseas partner is becoming an automated solution to most of these institutions.
When talking about partnership, Chinese people believe in “门当户对”or only work with people from “equal ranking or social status”. As a result, their first target will be world leading institutions such as J.P. Morgan, etc. People usually make this decision under such assumptions as: 1. They assume their investors will appreciate products from these world leading brands; 2. Without clear strategic reasons, working with the leading brands will always be a safe option to the fund manager.
These two assumptions seem to be quite prevalent among people we talk to. But are they valid assumptions? Not necessarily in my observation.
First of all, when Chinese investors buy an investment product, they trust the brand of the Chinese institution, not the brand of the product. This mindset is very well reflected when Chinese buy wealth management products from a bank. They trust the bank won’t run away with their money, regardless of what the product itself is about. Such mindset is shared by many investors in China, particularly those people who are not very sophisticated with investment.
What could this message imply? It implies that partnering with the large brand may not enhance credibility to the Chinese institution from their investors. Moreover, under this pattern, the Chinese institution could, in most cases, only sell standard products under brand names of these dominant partners, and end up becoming a distribution channel/platform for their partners.
A potential alternative is to partner with a relatively small, but boutique overseas institution. Many these institutions, like my client, have been operating over 2-3 decades and accumulated sufficient know-how, which makes them a good partner to develop customized products for the Chinese institutions through white labels. This will allow the Chinese institutions to sell a self-branded and well-tailored/differentiated product to their investors. This will gradually build values into their own brand without losing much autonomy. Many small to medium overseas institutions are happy to be a silent partner in order to share “China opportunities” with these large Chinese institutions. So it is time to take a second look of your overseas FoF strategy.