A Contrastive Analysis of mutual Funds between China and the United States
Executive Summary
Compared with American mutual funds, China's public offering funds (commonly known as mutual funds in US), lag far behind in absolute scale, relative scale and market influence. China's public funds are still in its infancy, and there is a huge space for the development of the public funds industry.
Most American families invest in mutual funds indirectly through retirement plans, while most Chinese individual investors buy public funds directly. Therefore, the U.S. mutual fund market is dominated by institutional investors, while China is dominated by retail investors. Long-term investments, such as institutional investors dominance and emphasis on pension, account for the largest proportion of stock funds in the United States.
The value of China's public fund market is far from being fully explored. To cultivate a large middle class and to strengthen individual investors' understanding of the professional ability of public funds is the prerequisite for the development and growth of public funds in China.
As an important participant in the era of large-scale capital management, banks should strive to select excellent fund management companies for customers and become managers of large-scale asset allocation for customers in the process of the development and growth of public funds. At the same time, we should strengthen investor education for customers, reasonably guide bank customers to diversify their funds, guide middle and high income groups to increase the allocation of public funds products, and train customers' long-term investment and asset allocation concepts.
As the largest and most developed market in the world, the fund market in the United States has been widely concerned by all countries. Although the development of China's public fund market is just in its infancy, and there are great differences between China's public fund market and the United States' fund market in terms of market environment and regulatory system, it is still of great reference value to study the current situation and trend of the development of China's public fund and capital market.
I. Overview of China and US Public Funds
U.S. mutual funds are the largest institutional investors in the U.S. financial market. By the end of 2017, the size of the U.S. mutual fund market was $18.7 trillion, ranking first in the world, accounting for 43% the size of the global open-end fund market, is in the absolute leading position. The size of the mutual fund market is 91% of the GDP of the United States in 2016. Comparatively speaking, the total size of public funds in China is 1.6 trillion dollars by the end of 2017. Although the size of public funds has nearly doubled compared with that in 2016, there is still a big gap compared with American mutual funds.
In terms of relative scale, the size of public funds in China is only 8.4% of the total size of American mutual funds. Compared with GDP, the size of public funds is 12% of China's GDP in 2016. Therefore, no matter the absolute scale or the relative scale, China's public funds have tremendous room for growth.
Over the past 20 years, mutual funds have been the largest institutional investor in the U.S. financial market and the largest holder of a variety of securities assets. In contrast, the influence of China's public funds on the capital market needs to be enhanced.
American mutual fund is the largest holder of stock market, commercial paper market and bond market, while Chinese public fund holds only a small part of the whole market.
American mutual funds are usually divided into stock funds, bond funds, hybrid funds and money market funds. Stock funds are the first type of funds. By the end of 2017, stock funds accounted for 55% of mutual funds. Unlike the U.S. fund market, China is currently dominated by money market funds, with the proportion of money market funds reaching 61% by the end of 2017.
In the United States, funds continue to flow into stock funds, while in China, funds continue to flow out of stock funds and into money market funds. Figure 6 shows that, except for individual years, the annual inflows to long-term mutual funds are relatively stable, mainly because the main holders of U.S. mutual funds are American households, and U.S. households hold mutual funds for long-term purposes, such as children going to school, retirement and pension, so they have a short-term market. The response to volatility is weaker than that of institutional investors, and the annual investment in long-term mutual funds (stock and mixed) is relatively stable. However, the investment of money market funds is greatly influenced by hedging sentiment and interest rate level, and the volatility is greater. In 2007 and 08, because of the need of capital hedging, funds flowed into money market funds on a large scale. After the financial crisis, funds continued to flow out of short-term money market funds and into long-term mutual funds. At the same time, the long-term low interest rate in the United States also made the investment enthusiasm of funds to money market funds low.
In our country, the proportion of stock funds and mixed funds has declined year by year, while the proportion of money market funds has increased year by year. For the first time in 14 years, the proportion of money market funds has exceeded 50%, becoming the largest type of funds. The persistent downturn and huge fluctuation of domestic A-share market are the important reasons for the continuous outflow of funds from stock funds and mixed funds into bank financial products and money market funds in recent years.
II. Analysis of Supply and Demand of Public Funds in China and America
(1) Demand analysis
American families are increasingly dependent on mutual funds
Chinese households'trust in public funds still Not high.
The demand for mutual funds can be examined by the ratio of assets allocated by households to mutual funds and the net inflow of mutual funds. The proportion of household financial assets allocated to mutual funds in the United States continues to increase. By the end of 2015, 22% of household financial assets in the United States were handed over to the mutual fund management. In contrast, according to relevant surveys, only 4% of Chinese household assets are allocated to public funds, and domestic investors'trust in public funds is still not high.
Over the past decade, the average net assets invested by American households in mutual funds have been $366 billion annually, with the exception of 2008, the net annual investment being positive. On the contrary, the average annual net assets of direct investment in stocks and bonds in the past ten years were – 274 billion US dollars, and the net outflows of direct investment in stocks and bonds in most years were net. This shows that American households'investment in mutual funds continues to increase, while direct investment in stocks and bonds continues to decrease.
Diversified asset allocation demand has increased the demand for mutual funds to invest in overseas stock markets.
Take index mutual funds as an example. Over the past decade, investment in overseas stock index mutual funds has continued to increase. In the whole year of 2015, the net inflow of index mutual funds was 166 billion US dollars, of which 28% were invested in domestic stock index funds, 45% were invested in overseas stock index funds, and 26% were invested in bonds or mixed index bases. Gold
(2) Supply analysis
The barriers to entry of the U.S. mutual fund industry are low and competition is sufficient; China's public funds have high entry threshold, and fund issuance relies excessively on bull market.
The United States has a very competitive mutual fund market, and almost all financial institutions can initiate the establishment of mutual funds, in which independent investment advisers are the main sponsors of mutual funds (Figure 10). Lower barriers to entry and adequate market competition make a large number of fund companies enter the mutual fund industry every year. At the same time, some companies are eliminated because of the cruel competition. The number of fund companies in the whole industry has maintained a relatively stable growth. From the number of mutual funds issued and set up every year and liquidated, we can also see the fierce competition in the industry. In 2015, 594 new funds were set up. At the same time, 285 funds were liquidated and withdrawn, and 177 funds were merged. The number of existing funds in the whole industry also showed a steady growth trend.
The number of public fund management companies in China has doubled in 10 years. The size of public fund issuance has increased several times in A-share bull market and continued to decline during A-share bear market. According to the statistics of the fund industry association, there are 105 public fund management companies in China in 2015, and the total scale has also risen from 0.47 trillion ten years ago to 8.4 trillion. Throughout the ten years of 2005-2015, the size of public funds has increased by more than three times in 2007 under the influence of A-share bull market. The total size of public funds has increased from 0.86 trillion in 2006 to 3.28 trillion in 2007. Then, during the bear market of A-share in 2008-13, the bull market of A-share in 14 and 15 years has continued to decline. It ignited the growth enthusiasm of public funds, which increased to 8.4 trillion yuan (Figure 12).
In terms of the average size and quantity of public offering products, the development of public offering funds also depends heavily on the bull market of A shares. Both the average size and quantity of public offering have achieved explosive growth during the bull market, and then remain at a low level. Although the number of issuance of bull market public funds decreased in 2007, the average size of issuance increased more than twice. During the A-share bull market in 2015, the number of issuance and the average size of issuance increased significantly (Figure 16).
(3) Industry concentration
US mutual fund company stays strong China Public Offering Fund Company has Competitive pressure is small. But There is a long way to go to stand out.
American mutual fund market is a market with both full competition and oligopoly characteristics. Although market entry barriers are low and competition is sufficient, the industry concentration is extremely high and the strong are always strong. It is very difficult for small and medium-sized fund companies to break through. Figure 14 shows that by the end of 2015, the top five fund companies in the United States had 45% of the market share of mutual funds, the top 10 fund companies had 56% of the market share, and the top 25 fund companies had 75% of the market share. This structure has lasted for many years, and the industry concentration has increased significantly. The same structure is expected to be maintained in the future.
The top ten fund companies in China's public fund industry also occupy a larger market share. Unlike the United States, the concentration of mutual fund industry in the United States has been rising in the past decade, while the concentration of public fund industry in China has been declining. Figure 17 shows that the scale of the top ten fund companies has increased from 0.3 trillion to 4.09 trillion in the decade 2005-2015, an increase of nearly 14 times, but the proportion of the top ten fund companies in the total fund company scale has declined year by year, and the industry concentration has shown a downward trend. At present, China's public fund market is still in its infancy. In the future, with the gradual liberalization of the domestic public fund field, more and more companies enter the public fund industry. After the intensification of competition, there will be a number of powerful high-quality fund companies. Industry concentration is expected to decline first and then rise as in the United States.
III. Analysis of Investor Characteristics
(1) Both Chinese and American fund holders are mainly retail investors.
American households are the main investors in mutual funds. Since 2000, the proportion of American households holding mutual funds has remained at around 40% and remained relatively stable (see figure 26). By the end of 2015, 89% of the US mutual fund's $16 trillion assets were held by US household units and 11% by institutional investors (see figure 27).
China's public equity fund holders are also mainly retail investors. In 2015, the proportion of institutional investors surpassed that of individual investors for the first time (Figure 18).
(2) Different ways of investing funds between Chinese and American investors
American households indirectly invest in mutual funds through pension schemes, while Chinese investors invest in public funds through direct purchases.
Although the main holders of mutual fund markets in China and the United States are retail investors, investors hold mutual funds in different ways. American families attach great importance to retirement pension investment. They believe in the investment ability of professional investment institutions. Therefore, their main way of holding mutual funds is to invest indirectly in mutual funds through the retirement pension plan (DC plans, IRAs) initiated by employers. 80% of American families holding mutual funds will adopt this method. Formula 19. Moreover, pension plans attach more importance to long-term investment. Retirement pension plans allocate a large amount of funds to mutual funds, which is also an important reason why long-term funds such as stock, bond and mixed funds account for the highest proportion in the whole mutual fund market.
The rapid growth of IRAs and DC plans over the past two decades also shows that American households are increasingly dependent on professional investment companies and that American mutual funds are playing an increasingly important role in the field of pension. By the end of 2015, 54% of fixed-contribution retirement account (DC) assets in the United States were managed by mutual funds, and 48% of IRAs assets were managed by mutual funds.
Individual investors in China hold public funds mainly through direct purchases. According to the report "Investigation and Analysis Report on Fund Investors" (2014) issued by China Securities Investment Fund Association, Chinese investors usually buy funds directly through banks, securities companies, fund management companies and other channels (see figure 20). Different ways of holding funds between Chinese and American fund investors have led to institutional investors dominating the US mutual fund market.
(3) Different purposes for Chinese and American investors to hold funds
American families hold mutual funds for pension purposes, while Chinese investors hold public funds for income purposes.
According to the survey report of the American Association of Investment Companies (ICI), American households hold mutual funds mainly for the following purposes: retirement pension, children's education, emergency needs, tax avoidance, and more for long-term purposes (see figure 32). In contrast, the main purpose of Chinese individual investors holding mutual funds is to obtain higher returns than bank deposits, followed by diversification of investment risks and pension reserves. The United States has a very complete pension system. At the same time, American families attach great importance to pension savings investment. They regard part of the investment of family assets and pension account as a long-term investment. Pension accounts mainly allocate assets to stock, bond and mixed funds to meet the family's long-term asset allocation needs.
(4) The awareness of public funds among middle and high income groups in China is obviously insufficient.
High-income families in the United States attach importance to mutual funds
It is of great significance for the development of public funds in China to guide the high-income groups to actively allocate public funds.
Figure 23 shows the proportion of households with mutual funds in different income families in the United States. It can be seen that families with higher average annual income are more likely to hold mutual funds. 74% of households with more than $100,000 annual income hold mutual funds. Only 9% of households with less than $25,000 annual income hold mutual funds. With the increase of income level, American households are more likely to hold assets. They are allocated to mutual funds. The huge middle class in the United States is the main force of mutual fund investment, which can provide a stable and sustained supply of funds for the mutual fund market. In contrast, the main investors of public funds in China are investors with annual income of less than 150,000 yuan, and the proportion of individual investors with annual income of less than 150,000 yuan is as high as 80% (fig. 24). Therefore, we should raise the income level of residents in China, cultivate a large middle class group, and reasonably guide middle and high income groups to allocate public offerings. It is of great significance for the long-term development of public funds in China to strengthen the understanding of the investment ability of public funds among middle and high income groups.
IV. Conclusion
By comparing the history and current situation of China's and the United States' fund industry, we can see that there is a big gap between China's public funds and American mutual funds in terms of absolute scale, relative scale and influence on capital market. China's public funds industry has a huge space for development.
At the same time, as an important participant in the financial market, the professional investment ability and allocation value of public funds are far from being fully understood by Chinese investors. With the advancement of China's financial mixed operation and the development of the era of large-scale capital management, more and more financial institutions will enter the field of public funds, which will undoubtedly continue to increase the competitiveness of the public funds market. At that time, a number of outstanding public fund management companies will survive in the fierce competition, stand out and do a big job. Strong, grow into an international first-class public fund management company.
As an important participant in the era of large-scale capital management, banks should strive to select excellent fund management companies for customers and become managers of large-scale asset allocation for customers in the process of the development and growth of public funds. At the same time, we should strengthen investor education for customers, reasonably guide bank customers to diversify their funds, guide middle and high income groups to increase the allocation of public funds products, and cultivate customers awareness of long-term investment and asset allocation.