Banks

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Economy

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Currencies

Asia markets tentative ahead of Opec meeting

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

Barclays: life in the old dog yet

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Categorized | Financial

Tianhong, the Cinderella story of Chinese investment


Posted on November 27, 2016

Like so many thousands before him, Xiaoming Zhou was a run-of-the-mill investment manager with the brilliant idea of starting his own hedge fund. Like most of the others, his plan failed.

But this is where the similarities end. Because after shutting the doors on the hedge fund, Mr Zhou set off down a path that led him to the Cinderella story of Chinese investment: Tianhong Asset Management.

Tianhong is a relatively unknown name, but Yu’e Bao, its money market fund, has attracted hundreds of millions of users in China. It has become symbolic of the huge demand for retail investment that can be unlocked by mobile phones.

The company, which allows internet shoppers to direct idle cash into money market investments from their smartphones, offers returns that beat those of bank accounts. Many shoppers are even unaware that their money is being invested.

Yu’e Bao means leftover treasure, and the fund’s astronomical growth since it was launched in 2013 has catapulted Tianhong from one of the smallest to the largest fund house in China, overseeing Rmb832.1bn ($120.22bn) of assets. Mr Zhou, who joined the company in 2011, is deputy general manager and an influential figure.

The publicity-shy economics graduate is the son of public servants, from a town outside Xi’an in central China. The 47-year-old speaks little English and a translator is given the difficult task of interpreting his conversation with the FT about money funds over a three-way conference call.

“The reason Yu’e Bao saw explosive growth is because at that time there was ecommerce, third-party payment and [the] internet. Mobile internet makes it possible for a product to reach a huge number of users in a very short time, to catch people who might not even have heard of wealth management before.”

Even with the awkward gaps and misunderstandings, it is impossible to mistake the huge ambition in Mr Zhou’s words. There is laughter over the phone as he reflects on the company’s success in China.

“Mr Zhou just joked to say that he came to Tianhong Asset Management in order to create Yu’e Bao,” the translator explains. There are worse jokes out there.

Investment companies across the developed world have experienced a shakeout since the financial crisis, when the ocean of liquidity that had buoyed capital markets for over a decade abruptly dried up.

Since 2008, low interest rates and slow growth have dented returns for fund managers in the West. Droves of retail and institutional investors have responded by abandoning active funds in favour of cheaper, passively managed alternatives.

Traditional fund houses in Europe and the US have been forced to staunch outflows by lowering fees. This painful metamorphosis prompted many to launch their own passive funds, while others consolidated to improve economies of scale.

But in the five years since Mr Zhou abandoned his hedge fund to join Tianhong, the company has become the country’s main money manager and gathered billions of renminbi in assets.

Ant Financial, an affiliate of Alibaba, the Chinese ecommerce giant, agreed to buy a controlling stake in Tianhong just months after Yu’e Bao was launched.

Rivals have scrambled to catch up: Tencent, the internet company, and Xiaomi, the world’s third-largest smartphone maker, have both launched similar money market funds that use social media and mobile phones for distribution.

In the face of increasing competition, Mr Zhou is restless for the next innovation.

“All those using Yu’e Bao, they do have other wealth management needs and we need to serve those needs as well,” he says. “After Yu’e Bao we are trying to provide other wealth management products in a very low-cost and user-friendly way to as many users as possible. We are hoping to provide both bond and equity funds to more users in the future.”

A suite of index-tracking funds launched last year point to Tianhong’s ambitions in exchange traded funds, which can be bought and sold on exchanges.

The index funds have not been marketed and are small in terms of assets, but Mr Zhou told FTfm last month that feedback from users will be used to hone the products before launching them as ETFs. “In the future we plan to launch ETFs, but we don’t have a specific timeline,” he said.

The main hurdle, he says, is that most Chinese investors are naive and miss out on returns during periods of volatility, such as those caused by widespread trading halts last summer.

“The saturation of markets in the past few years has been hurting our investors because they don’t really know how to select funds.

“They tend to sell at the very low point and then buy at a high point and get hurt by huge fluctuations of markets. They need some kind of financial advice.”

Ant Fortune, a wealth management app owned by Ant Financial, is trialling a background advice system, where a robo-adviser profiles investors and offers them portfolios that suit their needs.

If it works, it could provide the stepping stone Tianhong needs to launch ETFs and push actively managed funds.

With its 300m user base and the financial muscle of Alipay behind it, such a move by Tianhong could thrust China into a new age of retail investment.

There are also billions of investors in other developing markets to target. Ant Financial is mobilising for expansion in emerging markets under Eric Jing, its new chief executive.

Mr Jing has said that Ant Financial will aim to provide financial services to more than 2bn users over the next 10 years by partnering with companies abroad. Earlier this month it announced a tie-up with the online payments business of Charoen Pokphand Group, the Thai company.

Mr Zhou believes that world domination is inevitable: “He’s looking forward to seeing an overseas version of Yu’e Bao,” the translator says.

“Yu’e Bao was born because of third-party payments plus ecommerce. So it is a very natural logic.”