With growing demand from yield-hunting Chinese investors, Chinese asset managers are starting to offer quasi-investment banking products such as leveraged notes and repack notes to asset owners including insurance companies.
“Asset managers generally have a buyside mindset and therefore can choose the best fixed income products and derivatives for its clients,” says a managing director at a Hong Kong-based Chinese asset management company specializing in fixed income.
While asset managers and investment banks target similar clients in the note market, the two have different objectives and strategies. Asset managers mainly look to increase AUM while investment banks look to generate profits from a large transaction volume.
According to the managing director, unlike traditional investment banks which normally put only one underlying bond in a leveraged note, asset managers are able to offer leveraged notes with a fixed income portfolio as an underlying asset. In the meantime, asset managers are more flexible with notes redemption.
With regards to fees, asset managers are also challenging investment banks as they do not charge spreads or mark-ups on a transaction basis. However, a management fee is charged to investors on an AUM basis. The entirely different business models have prompted investors to have a further think before choosing service providers.
Currently, only a handful of asset managers such as E Fund Hong Kong are offering note service as part of their total investment solution. The financing business is still dominated by investment banks.
“If you ask J.P. Morgan Asset Management to do a leveraged note for you, they will probably ask you to go to J.P. Morgan Chase,” says the managing director.
On the other hand, asset managers are still essential clients for investment banks, despite competition in some areas. For some OTC products, asset managers still rely on investment banks to some extent. The large transaction volume also contributed to the investment banks’ flow business.
The rise of the China bond market has given rise to investment opportunities for a number of international investors over the past few years. China bonds issued in either US dollars or renminbi have now become a vital asset class for all institutional investors for either diversification or pure investment purposes.
China is now the most active market in the G3 space. Data from Refinitiv shows that Chinese issuers have issued a total of US$135.39 billion in bonds in the G3 market in the first nine months, accounting for half of the total G3 bond issuance.