Why pooled funds may go out of fashion among Chinese HNWIs

Popularity of pooled funds may wane following regulatory clampdown

POOLED investment funds have been increasingly popular among Asia-Pacific high net worth investors (HNWIs) seeking opportunities in the equity markets, while segregated funds remain the vehicle of choice for fixed income investments.

In China, which currently has the largest flows into pooled funds in the region, the strong growth has been driven by banks using mutual funds as the underlying investments for their wealth management products.

But although this trend is expected to continue, the popularity of pooled funds may soon wane among Chinese HNWIs following the clampdown on wealth management products, which regulators have cited as a source of instability in the financial system.

The penetration of pooled funds in Asia-Pacific ex-China stood at a robust 44% by the end of the first quarter of 2017, and at 53% with China included, according to data from Broadridge Financial Solutions.

“Whether it is a sub-advisory type arrangement for wealth management products in China or a way to access global strategies in Southeast Asia, there are more institutional investors that are increasingly open to using pooled funds. Following the new regulations there may be a fall in pooled fund sales to Chinese institutions,” says Yoon Ng, director of Broadridge Financial Solutions.

Broadridge research shows that pooled fund vehicles, ex-China, are most common for fundamental/active equity funds and money market funds. Between 2013 and the first quarter of 2017, outflows were strongest for fundamental/active equity funds, while inflows were strongest for money market funds.

However, segregated mandates continue to be the vehicle of choice for fixed income strategies. Corporate funds saw the strongest inflows between 2013 and the first quarter of 2017. “The average investment ticket tends to be bigger and hence it is easier to hand out the mandates,” Ng adds.