January 5, 2017 / 9:48 AM / 3 years ago

Fidelity gets first dip in China fund shark tank

FILE PHOTO: Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon

HONG KONG (Reuters Breakingviews) - Fidelity International will be the first foreign asset manager to wade into China’s brutal domestic market. A licence from Asset Management Association of China lets it raise funds from Chinese institutions and wealthy individuals and invest them onshore. This is a strategic win, but it’s no big concession.

Picking Fidelity ahead of rivals like Aberdeen and Vanguard may surprise those who thought the firm had sabotaged itself in China. In 2014 star manager Anthony Bolton, frustrated by his tenure at Fidelity’s China Special Situations fund, called the Chinese “great liars” and lambasted local corporate governance.

Since then that fund, which Bolton no longer runs, has revived, beating its benchmark MSCI China index by a handy 44 percentage points since launch. Fidelity’s standing in Beijing appears to have recovered as well. But for the Bermuda-based Fidelity - which became independent from Boston’s Fidelity Investments in 1980 but is still backed by the same founding family - being the first foreigner in is a negligible business advantage.

GRAPHIC: Fidelity China Special Situations fund performance: reut.rs/2hTp6m0

AMAC already boasts more than 17,000 local members, managing around $1.4 trillion. To make waves Fidelity will need to win brawls in the brutal war for Chinese financial talent, cope with distortions like excessive fund churn and rickety distribution networks, and most importantly convince Chinese clients it can out-invest domestic players. Then out-invest them.

Fidelity still wears policy shackles. It cannot market to retail investors unless it forms an approved joint venture, something foreign money managers are anxious to avoid. Intensifying Chinese controls on outbound investment makes it more difficult to sell offshore offerings, where Chinese investors might reasonably expect Fidelity to outperform local competitors. It’s also getting harder for companies and individuals to get their hands on foreign currency.

But hope springs eternal in the good fund manager’s breast. Beijing is keen to bring more institutional money into the financial markets, making them more stable, and the government knows firms like Fidelity can play a healthy role. Moves to flatten the playing field for foreign funds would help. Fidelity needs to execute, but starting early helps.

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