FIDELITY International, one of the world’s biggest pension managers, is taking a key first step in the Chinese market to tap a growing thirst for retirement solutions as the ageing of the world’s second-largest population quickens.
The firm’s Shanghai-based unit said on Thursday (Jan 16) it has set up its first multi-asset public fund of funds that caters to investors seeking stable returns for retirement. It’s based on a strategy the company said can readily produce products eligible for the nation’s fledgling individual pension plan once it wins regulatory permission.
In an early sign of strong investor demand, the new fund raised 867 million yuan (S$162 million) in eight days from public individual investors and Fidelity cut short the launch period after reaching its target early. That ranks it the third-largest fund of funds set up in China since the start of 2024 and the biggest ever distributed by a brokerage, Citic Securities.
Fidelity is gearing up for a new pension scheme that Citic estimates will expand to 12 trillion yuan by 2035. That’s even as the plan so far remains out of reach for global asset managers’ newly established onshore units due to their small onshore assets and short track records.
Beyond that, the firm is eyeing the potential stemming from China’s efforts to boost all three underfunded pillars of its retirement savings system. Authorities are seeking to tackle the challenges of an ageing population while providing long-term capital to the nation’s ailing stock market.
“The urgency of pensions has come to a point where it can no longer be neglected,” said Helen Huang, managing director of Fidelity in China. “That gives long-term foreign institutions more opportunities in developing and providing strategies that align with their beliefs,” she said in an interview in Beijing.
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China’s pension system faces an imminent funding shortage as ageing accelerates, birth rates drop and more young people suspend monthly contributions to the state-led “basic pension” plan, known as the first pillar. The government has since September delayed the retirement age and issued wide-ranging guidelines to support retirement finance, including adding more institutions to the basic pension plan, which now holds more than seven trillion yuan of savings.
Yet global asset managers, which were not allowed to fully control local mutual fund businesses until a few years ago, have barely had an opportunity to tap any of the pension money onshore. The more recent introduction of the tax-deferred individual pension plan, similar to Individual Retirement Accounts (IRAs) in the US that have become a US$13 trillion market, has raised high hopes among the likes of Fidelity and BlackRock.
Foreign managers mostly still do not qualify to launch so-called “retirement-target funds”, the only investment option eligible for the new scheme, because they lack a three-year track record of managing at least 20 billion yuan as required. On top of that, the performance of such funds has disappointed many local investors amid stock-market declines, with more than seven having to liquidate last year after failing to meet a 200 million yuan minimum threshold to keep going.
While that risks hurting investor interest, Huang said Fidelity can make a difference. “We have the confidence to reverse the situation,” she said.
The Fidelity Ren Yuan Stable 3-month Holding Period Hybrid FOF combines the company’s expertise from more than four decades of pension management in the US with Chinese client needs, Huang said, adding that it uses artificial intelligence to manage tail risks. The onshore vehicle would mainly invest in China-based mutual funds focusing on assets from stocks to bonds and commodities. It can also select Hong Kong stocks and funds through channels such as the stock connect.
Fidelity Investments, from which Fidelity International was spun off in 1980, is one of the largest IRA providers in the US, while what was formerly its international arm is now also a top pension manager in other markets such as Germany and Japan. The two firms are still both partly owned by the founding family.
The new China-tailored strategy was already tested in a few managed accounts for qualified investors since 2023, which delivered solid returns and a small maximum drawdown that was swiftly repaired, according to the company. In the US, the Fidelity Freedom 2050 Fund generated an annualised 8.9 per cent over the past 10 years.
Blaze trail
“We are fairly confident about this, and can possibly blaze a trail for a good multi-asset approach of the Y class in China,” Huang said, referring to the fund type reserved for the individual pension plan.
Challenges remain. More than 70 per cent of participants in the individual pension plan want the money to be locked up for no more than three years, reflecting weak commitment to long-term investments, according to a survey by China Southern Asset Management.
Still, more than 80 per cent of the participants have sensible expectations of returns of no more than 8 per cent, the survey showed. Around 40 per cent of them said they prefer solid track records, long pension management experience and big assets under management when choosing managers, suggesting potential interest in global firms.
Fidelity won approval to set up the onshore business in late 2022, and has since launched seven funds including both equity and bond offerings before the new fund of funds, managing about 10 billion yuan as of Dec 31. While Rajeev Mittal, former head of Asia-Pacific excluding Japan, said in 2023 he’s “hopeful” that the China business can turn profitable in the “not too distant a future”, the company cut jobs globally last year, including layoffs in China.
“Personnel optimisation” is normal to improve efficiency, Huang said, adding the company is “closer to and more confident” in the onshore business’s profitability. BLOOMBERG
