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Industry Analysis
The foreign fund wealth management market in China is growing at an exponential rate due to the recent changes in QDII (Qualified Domestic Institutional Investor) regulations, increasing access for the Chinese to invest in international financial markets. Even despite the recent financial crisis, at the end of 2008, the market for wealth management in China amounted to RMB 1.9 trillion. Domestic Chinese QDII management companies serve approximately half the market share for a total of RMB 1 trillion.
Foreign fund managers have captured the remaining at RMB 882 billion.
According to PricewaterhouseCoopers, foreign fund management companies “envisage a significant pick-upper in the next three years. By 2012, 66% of [fund managers]
anticipate they will have significant growth of between 21% and 100% per annum. PWC estimates an increase in the numbers of retail investors in funds, growing from 33.8 million currently to almost 69 million by 2012.”
PricewaterhouseCoopers, Asia Pacific Leader, Robert Grome, explains “The speed and extent of wealth creation in China far exceeds the investment opportunities currently available in the country, and therefore exposure to international asset classes in inevitable.
Clearly QDII at today’s market prices are far more attractive than back in September 2007.”
Market Segment
Key points in defining the market segment for Parsec International’s wealth management are mainly net worth and location.
Target Market Total Percent of Business 1. We will be selling primarily to
a. High Net Worth Individuals 45%
b. Emerging High Net Worth Individuals 25%
c. Mass Affluent Individuals 30%
2. We will initially target customers through:
a. Xiamen International Bank Distributor 50%
b. Local Financial Advisors 20%
c. Word of Mouth 20%
d. Advertising 10%
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3. We expect our target individual client to invest a minimum of $75,000 USD ( RMB 500,000) with Parsec International by the end of 2010. The $75,000 minimum is as required by QDII regulations.
4. Our primary focus will be on the greater Xiamen, China area, and afterwards, other tier-2 cities.
Currently, the Chinese foreign fund wealth management market is shared overall by 23 competitors: 23 Shanghai; 5 in Beijing; and 10 in Shenzhen. The major market segments for Parsec International can be separated geographically:
The first segment includes the tier-1 cities in China: Beijing, Guangzhou, Shanghai and Shenzhen.
The second segment are the tier-2 cities in China where Parsec International will concentrate her services: Chongqing, Dalian, Kunming, Ningbo, Tianjim, Xiamen, Zhuhai, Hangzhou, Harbin, Nanjing, Qingdao, Wushan and Xian.
Parsec International will be concentrating on the second segment of tier-2 cities.
CHINESE INVESTING ABROAD
Chinese HNWIs are looking to diversify their wealth by allocating investments on a more international scale. Recent developments on the regulatory front has paved the way for wealthy individuals to be able to move funds abroad through QDII. Chinese investors will find that Parsec’s fee-only financial services, proven track record and well-researched portfolios will meet their needs for investment diversification.
Customers will also benefit because of Parsec International’s unique capability to align its interests with that of the customer’s. Other financial funds charge commission rates that are not necessarily tied to a fund’s performance. Parsec International’s innovative
“fee-only financial planning,” couples together the financial goals of both Parsec International and the customer. This is to avoid the disastrous pitfalls of inundating investors with products that are only sold because of their high commissions for the salesperson. This is where Parsec International differentiates itself from other foreign fund managers in China. Parsec International acts as a fiduciary, always putting the client’s interests first.
LOYALTY & TRUST
“Based on fund management performance over the past 18 months, the stability of this market segment has been volatile with the world financial crisis. However, conceptually, the QDII product is sound and will eventually be very successful in providing mainland China investors with profitable international markets exposure” (Grome, PWC, 2009).
During the recent financial crisis, Parsec Financials AUM dropped to approximately half of 2007 levels, but then AUM increased gradually to its current level of USD $900 million (almost its original level before the crash). Parsec sustained its impressive
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attrition rate of 2-3%, despite the world financial crisis. Each year Parsec typically gains 8-10 % growth in clientele, for a net gain in 6%. This was no different during the crisis, which highlights Parsec Financial’s excellent customer communication, service and dedication.
FEE SCHEDULE BASED ON AUM (Assests Under Management)
Our proven equity investments generally appeal to the HNWI, Emerging-HNWI and Mass Affluent segments of the market. Our management fees are assigned based upon asset class. More fixed assets (i.e. US Treasury Bonds) will be charged a .6% rate.
Management fees for equity accounts are:
Billable Asset Level Annual Rate QuaterlyMin Quarterly Max 0 – 500,000 1.0% 1,000 1,125 500,000 – 1,000,000 .90% 1,125 2,000 1,000,001 – 2,500,000 .80% 2,000 4,375 2,500,000 – 4,000,000 .70% 4,375 6,000 4,000,001 – 6,000,000 .60% 6,000 7,500 6,000,001 – 8,000,000 .50% 7,500 8,000 8,000,001 – 50,000,000 .30% 8,000 37,500 50,000,000 and above .30% 37,500 N/A Biz Partner / Family Best rate .50% 1,000 N/A Friend Best rate .70% 1,000 N/A Charity .40% 1,000 N/A
The vast majority of new business will be initialized through our joint venture with Xiamen International Bank and our own investment representatives. Additional new business will come through word of mouth and advertising.
Over the past 10 years, similar investment firms have proven that there is a strong demand in the Chinese market for foreign investment options. These companies have primarily focused on equities, fixed income, money markets, cash and overseas assets with a strong focus specifically on equities. These products have been successfully distributed throughout the heavily regulated Chinese banking industry. Wealth management firms in tier-1 cities all offer products that appear similar to our own, but their fees are almost double and they do not offer services in tier-2 cities.
Of the 364 thousand Chinese HWNI, as well as Emerging-HNWI and Mass Affluent Chinese, approximately half of these clients will allocate significant portions of their net worth amongst foreign fund managers to diversify their portfolios, raise their net worth and manage their assets abroad.
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Source: Industry analysts, PWC Foreign Fund Management Companies, April 2009.
Based on industry analyst forecasts by Capgemini and PWC, and factoring in current trends and potential market position, estimates indicate that Parsec International should easily be able to attain AUM of USD $100 million within 5 years (2015). The market potential for wealth management services in these quantities—with an average fee of 0.750%—will yield approximately USD $750,000. This translates to a Parsec International market share of approximately .09% of the overall market.