Henry Zhao, chairman of China’s Harvest Fund Management, talks about his pioneering role in the industry and why he thinks Chinese Reits will be a game changer for the country’s equity market.
The following article is from The Business Times
Published on Saturday, April 24, 2021
by LESLIE YEE: lyee@sph.com.sg
www.businesstimes.eom.sg/the-raffles-conversation/scholaleader-who-dreams-big
“Looking towards the next 10 years, our business strategy will focus on the forward-looking smiling curve,” declares Henry Zhao, chairman of Harvest Fund Management, one of China’s biggest asset managers.
In the broad middle will be Harvest’s traditional business featuring bonds and equities. Volume will grow, but in its mainstay China market, both market share and margin will come under threat – like with the case of active managers in the US market.
“Active management business models and fees in Asia will face pressure from passive investment methods such as exchange-traded funds,” says Dr Zhao, speaking to The Business Times from Beijing.
Where the growth opportunities for Harvest – which has assets under management (AUM) of around US$200 billion – will come from lie on the two ends of the smiling curve, depicting wealth management and alternative investments.
Wealth management will focus on serving the burgeoning number of high net worth individuals and family offices, in China or elsewhere in Hong Kong or Singapore. Increasingly, these wealthy individuals will be serviced with the help of digital platforms, notes Dr Zhao.
He is excited about alternative investments – which will include real estate investment trusts (Reits), logistics products, structured products, hedge funds and private equity – and is looking to come up with unique offerings in order to preserve margins.
The career fund manager predicts that the Chinese Reit (CReit) market will see its first product launch in the second half of this year.
“The CReit product will be popular as it provides investors such as pension funds with an alternative instrument that pays steady cash dividends, which is uncommon in the Chinese equity market,” says Dr Zhao, who has advocated for Reits in China.
He calls CReits a game-changer for the China equity market. In his view, CReits will bring about positive change through shifting the market’s focus to dividend and offering investors who are looking for yield an option. Trusts focused on infrastructure in China could also be an interesting area space, he reckons.
Dr Zhao hopes that with the emergence of CReits, other listed groups in China could work on growing their dividend payments to reward investors.
Speculators pursuing quick gains are still an important part of the Chinese stock market, accounting for more than half of trading volume, but over time the market has attracted more sophisticated investors, he notes.
Improving stock market
Also, over the last few years, Dr Zhao has seen a trend of individuals moving away from off-balance sheet investment products offered by financial institutions to more professionally managed funds.
Still, to date investors in Chinese equities across various sectors are largely getting returns purely from capital appreciation, he notes.
“The Chinese stock market is a weak efficient market, but it has improved over time,” observes Dr Zhao, who has spent considerable time studying the behaviour of Chinese investors.
Harvest – whose shareholders are state-owned China Credit Trust, Deutsche Bank’s DWS Group and privately held Lixin Investment, in the proportion of 40:30:30 – was set up in Beijing in 1999.
Today, its AUM of US$200 billion is largely split between fixed income and equities. The largest client segment is mutual funds, while other major client segments include China sovereign funds, pension funds and separately managed accounts.
Harvest focuses on offering active management driven by deep fundamental research.
Dr Zhao, who has been with the group since 2000, describes the first 10 years of Harvest as the “growing-up” phase like that of childhood.
Growth was rapid as the group rose from being a small player to be among the top three Chinese fund managers, and built up its brand equity.
He then likens Harvest’s next decade spanning 2009 to 2019 to that of a teenager becoming a young adult. Harvest became more professionalised and broadened its offerings to multi-strategy products, be it growth, value, sectoral or thematic funds.
Harvest is now in its third decade. Dr Zhao’s target is for the group to triple AUM to US$600 billion within the next 10 years.
Harvest’s Singapore operations, which were set up in 2018, are also growing. Today, its clients comprise 30 per cent from South-east Asia and 70 per cent from Greater China. It looks to reach AUM of US$1 billion in two years time.
Across the group, growth in AUM, revenue, profit, headcount and clients over Dr Zhao’s 21 years with Harvest has been rapid.
But amid the business growth, the returns achieved for clients and accompanying industry accolades received, what the scholar leader terms his biggest achievement is making Harvest a unique thought leader that’s dynamic and competitive.
Offering ample opportunities
As a pioneer in China’s fund management industry, Dr Zhao has through the years mentored many who have gone on to lead other fund houses.
In the early years, there was no fund management talent in the China market, so much time had to be spent training new hires, he says, lamenting: “After you dedicate time and resources to developing the talent, the pity is that as the industry grows they may leave the firm to join another or open up their own shop.”
But with Harvest building scale, branding and a platform, the group today can better offer ample opportunities to retain staff.
Born in Tianjin in 1966, Dr Zhao says he is from a lucky generation. Through luck and hard work, he got into good universities at a time when competition for places was less intense and subsequently he managed to ride the wave of China’s economy opening up.
Dr Zhao spent the first three years of his working life as an assistant engineer working on designing televisions.
His interest, though, was in management, where he pursued a master’s degree in economics and business management.
Dr Zhao says he was fortunate to get on a China-US economics education programme where he was taught by top academics from the United States and Europe. Thus he was exposed to leading economic theories and models at a time when academia in China revolved around planned economies. Dr Zhao went on to complete a doctorate in economics where his thesis was on economic reform in China.
Technology and talent are at the forefront of Harvest’s business today, according to Dr Zhao. Huge sums are invested in software and many hires hail from science and engineering backgrounds. Harvest’s 1,500-strong workforce has more than 60 PHD holders.
Indeed, Dr Zhao sees Harvest as a technology company. The group uses human talent with tech backgrounds to help in automation and digitalisation as well as in evaluating businesses, given the key role of technology in various businesses today.
“Our business uses artificial intelligence to support human intelligence,” he says. He highlights that Harvest is developing databases and knowledge maps for 192 sub-sectors in China.
Dr Zhao is confident of the prospects for the Chinese economy in the near term, where successful efforts to contain the Covid-19 pandemic has paved the way for economic recovery, as well as the long term, with its huge economic potential.
In this digital age, groups in the technology space will continue to be an exciting area to look at for investors, says Dr Zhao.
While current technology leaders such as Alibaba and Tencent are focused on providing business to consumer platforms, the next big opportunities lie with business-to-business platforms, in his view.
Dr Zhao is excited by the work being done by numerous emerging Chinese companies on this front and thinks that many big groups will emerge by being successful in different business verticals.
He also thinks the ability to build strong horizontal platforms needed to serve consumers may not translate easily into building strong vertical platforms to serve businesses.
Other areas that are exciting in the Chinese economy are in healthcare and pharmaceuticals including generic drug development, he adds.
With the Chinese economy maturing, the easy gains from playing catch-up with advanced economies are long over, he notes. Businesses are, however, getting more sophisticated and prospects are good so long as businesses continue to innovate, Dr Zhao says. He is positive on prospects for Tier 1 cities and the Pearl River Delta.
Nonetheless the Chinese economy will have to confront constraints to growth from an ageing population and low birth rates, notes Dr Zhao. He sees the demographic challenge that comes with a peak followed by a subsequent fall in the labour force as perhaps the greatest challenge to the economy.
Also as China grew rapidly some problems accumulated including the excess of credit in certain parts of the economy, observes Dr Zhao.
He acknowledges that international investors have concerns over corporate governance of Chinese companies. But he thinks there has been much improvement over the last two years, in part because penalties for egregious breaches can include imprisonment.
Still, Dr Zhao has a major bugbear with Chinese groups on corporate governance. If the owner wants the group to be a listed public company, then let control of the board be in the hands of independent directors, he opines.
Harvest has stepped up efforts in looking at sustainability when it comes to investment decision-making. Harvest’s China environmental sustainability governance (ESG) programme involves proprietary ESG scoring and research, and regular ESG risk monitoring and alerts. The results are accessible on an ESG dashboard that is integrated into Harvest’s core investment platform.
Managing talent
While constantly thinking of the business and markets, Dr Zhao enjoys skiing as a way to unwind, and winter finds him invariably headed to the ski slopes. The hobby allows him to switch off as it is too dangerous to think while skiing, he quips.
He sees his leadership style as being that of a scholar mentality. Time is largely devoted to thinking of strategy and incubating new areas of business, while monitoring performance and managing the human talent.
“I don’t like to push my people with force or pressure. Instead, I like to provide room for self-driven growth,” he says. He believes good talent can be motivated to deliver performance, which is not measured on a one-year basis but rather over periods of three or five years.
Dr Zhao sees himself as a teacher. He wants Harvest to recruit the best students from top universities and then spend much time teaching them skills, culture and standards.
While he has notched up many achievements as a pioneer in China’s fund management industry, he does not see himself as being particularly gifted or talented.
He reserves the terms instead to describe the many successful founders of large enterprises in China, citing for instance the founders of Huawei and Fuyao Glass.
For a man whose business is to help clients build and preserve financial wealth, Dr Zhao sees himself as a fairly contented person. “Wealth is a by-product of reaching your goals and not the goal itself,” he says.
He adds that it would be fairly easy for him to seek personal fortune by setting up his own fund house but views his legacy as that of growing the tree that is Harvest and contributing to others.
“With my work, I like to benefit as many people as possible, including my clients and my employees,” says Dr Zhao, who is committed to make Harvest a global leader.
He also wants to contribute to the fund management industry globally through thought leadership.
He believes Harvest has positioned itself well as a China specialist for global clients. Where it has not done as well is to service Chinese clients in accessing investment opportunities outside of China. He attributes this to Chinese investors being faced with foreign currency controls and Harvest’s somewhat limited footprint in the US and Europe.
Dr Zhao jokes that if he speaks better English, perhaps Harvest would do better internationally. Dr Zhao, who uses mostly Mandarin during the interview, keeps being apologetic that the interview is not being conducted entirely in the English language.
When it comes to his own children, Dr Zhao says they are independent persons who need not follow him into fund management. He wants them though to study in the US so they can be proficient in English.
HENRY ZHAO
CHAIRMAN
HARVEST FUND MANAGEMENT
1966: Born in Tianjin, China
EDUCATION
1987: Bachelor’s degree (Electrical Engineering), Tianjin University
1990: Masters (Economics and Business Management), Tianjin University
1997: PhD (Economics), Guanghua School of Management, Peking University CAREER
1987 – 1997: Various positions in financial investments, capital markets operation and corporate management
1999 – 2000: Deputy Chief Executive, Dacheng Fund Management
2000 – 2017: Chief Executive, Harvest Fund Management
Since 2017: Chairman, Harvest Fund Management
Since 2015: President, State Legislative Leaders Foundation (SLLF)’s Asian Chapter and VP, SLLF’s US Chapter
Since 2016: VP, Asset Management Association of China