- Regulator imposed 1.2% management fee rate cap to public funds in China, and also plan to lower trading & sales commission they pay
- We estimate 0.1-7.7% earnings impact (weighted average: 2.8%) to the six brokers under our coverage due to the cap
- Short-term -ve to share price given the earnings impact, but the fee cut could boost industry-wide AUM growth and facilitate market consolidation, benefitting leading players in longer-term
Fee cut rumour materialised: Multiple onshore media have reported possible fee reduction in public funds since May 2023 and it’s finally made official. Specifically, rate cap of 1.2% was imposed to management fee, and public fund managers should comply by end of 2023. This move focuses in driving down the fee rate of active equity funds, which currently has a weighted average fee rate of around 1.32%. Major public fund managers announced downward revision of certain funds at the same day. The regulator also suggests to lower (1) the trading commission of public funds paid to brokers (by end-2023) and (2) the sales commission paid to channels (by end-2024), in order to share more profits with fund investors, boost industry AUM and eventually to lift direct financing ratio.
A move to boost AUM growth: While the fee cut will inevitably drag brokers’ earnings in near-term, we think it would also accelerate AUM growth and bring multi-fold benefits to brokers. Per our preliminary analysis as appended, we estimate (1) 0.1-7.7% earnings impact from management fee cut, and possibly another (2) 2.4-4.8% from trading commission cut if the average fee rate is lowered from 7.58bps in 2022 to 4bps per rumours. Nonetheless, the 1.2% cap sounds reasonable, which is still substantially higher than US active equity funds’ average of 0.68% in 2021 (down from 1.08% in 1996). We expect short-term -ve share price impact especially on GF (up to 12.5% earnings impact). Yet, leading players like GF are also well positioned to benefit from potential market consolidation in medium term. The acceleration of A-share institutionalisation will also boost trading volume and stablise the market, which also help offset earnings impact on brokers.
Estimated earnings impact
*Assume all equity / hybrid funds need a fee cut; the AUM is adjusted by % shareholding of public fund entities owned by their respective brokers
Source: Company data, East Money, Caixin, Wind, DBS HK