China's mutual fund industry continues to expand despite a difficult year for the asset management industry. However, new research from a global research and consulting firm finds that competition will only get more intense as the landscape becomes more diversified.

These are some findings from Cerulli's research initiative, titled "Asset Management in China 2018".

China's mutual fund assets under management (AuM) grew 15.6% over the first nine months of 2018 to surpass RMB13 trillion (US$1.9 trillion). Net new inflows amounted to 1.6 trillion yuan during the same period, supported mainly by net inflows of 1.4 trillion yuan to money market funds (MMFs).

MMFs remain the most-favoured products, with their AuM accounting for around 62% of the total. The declining yield of MMFs, partially due to the tightened regulations on liquidity and risk management, did not stop investors rushing into these "safe havens," amid the economic and stock market downturn.

However, 2018 was a year of struggle for most managers, especially those managing equity products. Many funds failed to raise assets during their initial offer periods or extended their fundraising periods.

The industry landscape is also becoming more diversified and competitive, with managers from private fund and distribution platform backgrounds joining the game. The launch of banks' subsidiaries for wealth management products could also rival fund managers to some extent. In addition, Cerulli expects the first fully foreign-owned fund management company to be approved in three years' time.

"Competition will only get more intense. Among small and mid-sized managers and newcomers, only those with strong know-how in specific niches will be able to grab meaningful shares of the pie," says Miao Hui, a senior analyst with Cerulli who leads the China research initiative.

On the other hand, China's progress in digitalization offers managers more online channels to reach the huge mass retail market. For example, the distribution of MMFs has extended from traditional channels to internet platforms.

Besides Ant Financial, which operates Yu'e Bao, many internet companies have launched various "baos," or online MMFs, in recent years. Now, Tencent is joining the fray with the launch of its WeChat Mini Fund. Although the Mini Fund—which is still being tested—lacks strong innovative features and comes several years after Yu'e Bao's launch, WeChat's more than one billion users provide a solid foundation for this platform.

A clear outcome is that MMF managers will ultimately benefit from the greater variety of distribution channels. They can also expect online distribution to extend to other products, once user stickiness is built, and MMFs' returns become less attractive. The recent popularity of short-term bond funds is a good example. "We believe more assets could move to managers—in particular, those actively educating customers and engaging them with technology," says Miao Hui.