Global fund managers are ramping up their presence in China, aiming to be well ahead of next June's inclusion of mainland-listed stocks into MSCI's benchmark index that is set to boost investment into the economy's $8 trillion equity market.
Wells Fargo Asset Management, Neuberger Berman, Fidelity International and Robeco are among fund houses sharpening their stock-picking skills in mainland "A" shares and hiring staff in China to get a first-mover advantage before the rebalancing triggers a flood of passive index-tracking funds to that market.
Anthony Cragg, Colorado-based senior portfolio manager at Wells Fargo Asset Management, visited China just two weeks after MSCI decided on June 20 to include 222 Chinese big-caps into its Emerging Markets Index.
MSCI will start phasing in Chinese shares from June 2018 but Cragg is already in search of the country's "future blue chips."
"It's a game changer for China investment because one year from now passive funds have to buy. They have no option. Active funds can move between now and then," Cragg said.
Active funds can select the companies they think have better growth potential and add them to their China-focused funds now.
Cragg, who manages $2.2 billion in several funds - including one dedicated to China - said A-shares account for roughly 18 percent of his China Equity Fund, but he wouldn't be surprised
to see the weighting rise to a ceiling of 25 percent within a year.
Some fund houses are building up their domestic businesses to deepen knowledge and expertise. Neuberger Berman is relocating its Chinese equity research from Hong Kong to China.
More than 20 global managers, including Fidelity, Aberdeen Asset Management, Bridgewater Associates, Mirae Asset, Vanguard, Allianz and Schroders have set up wholly-owned investment
subsidiaries in China, and the numbers will rise to at least 30 by the end of 2017, according to fund consultancy Z-Ben Advisors.
In addition to strengthening their on-the-ground research capabilities, these units are being used to grow onshore fund businesses in China, with an escalation of activity seen over the past six months, the consultancy said.
"When the markets are as big as they are in China, the big global investors have to become local investors...that's how you can get information, that's how you can create information advantage," said Nick Hoar, head of Asia-Pacific at Neuberger Berman, noting huge growth potential for foreign firms.
"Apparently the powers are shifting, and the flows are shifting toward this market," Hoar said, adding that large pension plans will have to slowly allocate directly to Chinese local assets.
Dutch asset manager Robeco has set up a wholly-owned subsidiary in Shanghai to beef up it research capabilities. Its China research team will focus on A-share investment research and will provide advice to Robeco portfolio managers globally.