The landscape of asset management in China is evolving, marked by an ongoing transition towards net value managementThis shift compels various asset management institutions to alter their operational strategies, encouraging a regulatory-driven transformation that enhances resilience amidst market fluctuationsAs these firms navigate the complexities of the current environment, several key issues have emerged, particularly in the realm of bank wealth management.

This sector has recently reached an impressive scale of 30 trillion yuan, yet it is grappling with declining asset yields and the ramifications of an 'asset shortage.' The market is witnessing increased volatility, a confluence of factors that create a challenging atmosphere for asset management entitiesAt a recent gathering, the China Wealth Management 50 Forum saw executives from various bank wealth management subsidiaries discussing strategies to better respond to regulatory demands and capitalize on investment opportunities like passive index investing.

A significant insight from the conference highlighted that the traditional paradigm of high-yield, low-volatility products is under severe pressure

Many banking executives expressed concerns that the fundamental business models that once supported bank wealth products are becoming less viable due to the evolving market and operational landscapeAs regulatory policies encourage bank-funded participation in capital markets, the proportion of equity investments remains stubbornly low, suggesting a dire need for transformation within the banking wealth management framework.

According to Zhong Wenyue, president of China Merchants Wealth Management, current market conditions have led to diminishing returns on non-standard assets, the discontinuation of manual interest supplements, and restrictions on interbank deposit ratesHis observations highlighted that approximately 95 percent of the funds in this space are allocated to low-risk (R1) and low-to-medium-risk (R2) products, underscoring a critical challenge towards achieving portfolio diversification and enhanced risk-adjusted returns.

The volatility of the bond market has further compounded the predicament facing wealth managers

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Zhang Jianying, a deputy general manager at Ping An Asset Management, noted that the influences affecting the bond market have become increasingly intricate, leading to pronounced fluctuations compared to previous yearsAs market dynamics shift, the capacity for effective management during periods of abrupt market reactions has become a significant hurdle for investors, prompting many to reconsider their commitment to legacy wealth products.

This emerging reality leaves wealth management firms in a precarious position; while the yields of mainstream banking products decline amidst increasing volatility, the ability to invest in equities remains disappointingly unexploitedYuan Zhihong, chairman of Huaxia Wealth Management, candidly discussed the limited overlap between China's nearly 100 trillion yuan capital market and the 30 trillion yuan bank wealth management sectorHe emphasized the inherent challenges—such as a lack of long-term expertise and structured mechanisms—that inhibit these firms from effectively transitioning into growth-oriented equity investment roles.

As the wealth management sector strives for maturity, there is consensus on the necessity for enhanced core asset research capabilities

The "fixed-income + equity" strategy has emerged as a focal point for many asset management firms, reflecting a broader acceptance of the need to diversify investment approachesZhong Wenyue stressed the urgency for bank wealth management products to evolve beyond their legacy offerings, moving towards a more balanced portfolio that includes a higher proportion of mid-risk (R3), moderately high-risk (R4), and high-risk (R5) products.

To do this successfully, institutions need to bolster their investment research capabilitiesProduct design teams are advised to enhance their focus on multi-asset and multi-strategy research, ultimately aiming to provide products with lower volatility and competitive yield curves, which are essential for maintaining investor interest and market relevanceGao Xiangyang, president of ICBC Wealth Management, echoed this sentiment, advocating for a fortified investment research capacity to navigate the low-interest-rate environment effectively.

Particularly in this climate, experts have urged wealth management firms to adopt a three-pronged strategy: broaden their asset pools, innovate new investment strategies, and delve into niche opportunities within specific market segments

By expanding their asset range, firms can leverage lower correlations to consistencies while pursuing different investment avenues like commodities and REITs, which could offer distinct risk profiles amid prevailing market conditions.

In addition to enhancing fundamental investment capabilities, there is a mounting trend towards passive index management as a vital component of equity investments for bank wealth management subsidiariesAchieving optimal management of passive index products involves overcoming significant challenges related to tracking errors and striving for consistent excess returnsThis necessitates a robust systemic foundation within asset management firms, proficient trade execution skills, and a commitment to process improvement.

As firms adjust to these emerging trends, they must also refine their client advisory services, ensuring comprehensive product offerings that are tailored to meet diverse investor needs