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The changing landscape of asset management in China

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Harvest Fund Management believes its local knowledge and approach to research gives it an edge over international asset managers on critical market issues such as the development of ESG investing.

As a leading asset manager, Harvest Fund Management is committed to the welfare and sustainability of domestic financial markets. With ESG considerations increasingly impacting upon Chinese companies and their stock prices the firm believes fiduciary managers must incorporate these considerations into their investment research and decision-making.

ESG is crucial to the sustainable development of Chinese financial markets. As wealth increases, people are also increasingly demanding improvements in quality of life in areas such as air and water quality, product safety, and cybersecurity and privacy.

However, global frameworks often lack the granularity to capture unique practices in local markets, which could be material to investment returns and overall sustainability. For example, company founders pledging shares as collateral when raising capital is a common practice in China but rarely found elsewhere. When the percentage of pledged stock is high, significant price movements could result in changes in ownership.

To improve its understanding of ESG standards across different markets and how these can be applied to China, Harvest Fund Management has established a dedicated team providing focused research support and integration process management.

This team evaluates ESG insights systematically and regularly to reduce overall exposure to tail risk and capture hidden risks that are often neglected by traditional financial analysis. They work with analysts and portfolio managers to incorporate these insights into fundamental analysis and help portfolio managers make better-informed decisions.

Jing Lei, chief executive officer, Harvest Fund Management says the firm can encourage better corporate governance through its ESG research activities. “Our teams in Beijing and Hong Kong have developed localised models that not only produce scores for listed companies but also for mutual fund products. In an inefficient market where the scope for alpha is increased, our ESG research has proved beneficial to both institutional and retail customers,” he explains.

Thanks to its proprietary assessment framework and scores covering the entire A-shares market, the firm’s ESG factor and strategies have delivered excess returns during the COVID-19 period and are expected to continually outperform over long-term investment horizons.

A key element of our approach is in-depth, fundamental research. When faced with a myriad of potential investment targets, finding the best target will depend on the fundamentals.

A deep understanding of the Chinese market and economic structures including specific sectors and companies is vital. Harvest Fund Management believes structural research is more applicable than trend research when it comes to identifying opportunities for growth in the domestic capital markets, a view that sets it apart from many international investors.

“We have invested heavily in technology and data analytics,” says Lei. “A key element of our approach is in-depth, fundamental research. When faced with a myriad of potential investment targets, finding the best target will depend on the fundamentals.”

The firm has worked with postdoctoral fellows at Peking University in developing financial theory specifically for inefficient markets applications. This is important because the basic theory currently used in the capital market is based on the assumption of an effective market, yet asset managers need the ability to conduct in-depth research on the assumption of an inefficient market.

Theoretical study - coupled with practice - will lay down an important foundation for investment research personnel to form an effective, systematic and actionable research methodology.

Harvest Fund Management has conducted long term and in-depth research, using a combination of top-down and bottom-up methods, to fully dissect the underlying principles of the domestic market. Potential structural opportunities are mainly focused in four areas:

  • Science and technology

  • Healthcare and medicine

  • Consumer

  • Advanced manufacturing

A comprehensive understanding of the underlying patterns that guide the Chinese market is essential. Current and future opportunities for growth in the domestic capital market will be mainly of structural nature and while the market may develop along similar lines to those in Europe and North America, the development period will be shorter.

Indeed, there is a possibility that China may skip the more basic passive index stage and move straight into the smart beta phase.

According to Lei, customer relationships will be vital to the success of asset managers in China over the next decade. “Ten years ago there were maybe 600 mutual fund products available – now there are more than 6000,” he says. “As the number of products available continues to grow and it becomes easier for investors to purchase them, managers will have to improve customer loyalty.”

Content is king, concludes Lei. “Managers need to look at how their content is organised and how they attract interest. In this area we can learn from how the major online companies encourage consumers to spend time on their apps.”

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