Profits are likely years away for foreign fund managers rushing to set up shop in China, with the country's vast promise outweighed by fierce competition, slowly maturing markets and slim investment options.
The sector has already produced steady losses at joint ventures involving some of the world's top investment managers, losses that eager new entrants will also incur, industry analysts said.
"Anyone who is going into this market with an expectation of short-term profits is totally unrealistic. I think that's got to be the message that comes across," said Bonn Liu, a partner in KPMG's financial services practice in Hong Kong.
The prospect of hundreds of millions of new customers in China has proved to be irresistible to top wealth managers, attracting companies such as ING, Societe Generale and Allianz AG to the region.
Official data show that funds under management in China have ballooned to about $60 billion at the end of 2005 from virtually zero six years ago.
The chief lure is the country's stockpile of about $1.7 trillion in personal savings that the fund industry would love to see migrate into fee-rich products such as mutual funds.
Europe's top bank, HSBC Holdings, joined the migration this month, opening the doors of HSBC Jintrust Fund Management Co Ltd, a joint venture in which it owns 49 percent.
But senior HSBC managers have already played down the prospect of near-term profits from the venture, which it hopes will launch its first fund next month.
"We're in an excellent situation to do well over the long term. I'm just saying everybody has to be realistic. This is not one of these industries that pays back immediately," said Blair Pickerell, chief executive, Asia-Pacific for HSBC Investments.
Pickerell said the many challenges include narrow distribution channels, a limited selection of products and lack of investor education to adjust to a new investment culture.
The industry veteran pointed to recent fund launches that raised millions, only to have customers rush to redeem their products months later.
"In many cases, those end investors either didn't know what they were buying, or didn't really want it in the first place. They bought it because a friend asked them to buy it, or their bank managers said 'can you do us a favour?'," he said.
Ventures that quickly bled funds include Prudential Financial Inc's Everbright Pramerica. It raised about 2.4 billion yuan in the initial offering of its first stock-focused fund in August 2004. But the mutual fund lost about 12 percent of its net assets in the full year of 2005 when the main stock index fell about 8 percent, according to public data.
The venture's chief investment officer, Robert Horrocks, recently left the firm and the company apologised in an open letter to investors for its performance.
Chinese stocks, which are up more than 12 percent so far this year, have only recently begun to rebound from a four-year slump, which analysts said is another key problem for foreign firms looking to build profitable operations.
"There's just not enough to invest in, quite frankly until we get a lot more IPOs, a lot more quality companies coming to the Shanghai market, then there's a lack of investable product," said Robert Grome, head of the Asia Pacific investment management industry group for PricewaterhouseCoopers.
Grome said a lack of scale is another obstacle to profit. But given their relatively modest investments in the region, he thinks few foreign fund managers are very concerned about losses.
Since 1998, China has approved the creation of 53 mainland fund management companies, about 20 of them joint ventures, said Zhang Ning, a Shanghai-based senior China Securities Regulatory Commission official in charge of fund applications.
Competition is only expected to intensify.
Zhang said the industry watchdog will continue to encourage local players to tie up with foreign partners to gain "better management and expertise". Late last year, Beijing also cleared the way for local banks to run their own fund ventures.