Bank of Montreal has purchased a minority stake in Shanghai-based Fullgoal Fund Management Co. Ltd., making it the first foreign-owned bank to buy a position in a Chinese mutual fund company.
BMO acquired a 16.7-per-cent stake in Fullgoal, which is now split evenly among six different shareholders, including Haitong Securities, one of the country's largest brokerage firms.
Fullgoal manages approximately $1.4-billion worth of assets, ranking it seventh among the roughly 20 fund managers in China.
Terms of the deal were not disclosed, but the bank said the size is not material.
The move is an attempt to cash in on the vast potential of the Chinese mutual fund industry, which has only been operating for about five years.
The country currently boasts an estimated $1.6-trillion in bank deposits -- larger than the size of the entire Canadian economy -- while assets available for management are expected to grow to between $102-billion and $205-billion in the next five to 10 years, according to the bank.
"The size of the market is absolutely enormous," said William Downe, deputy chairman of the bank and chief executive officer of BMO Nesbitt Burns Inc., the bank's brokerage arm.
Mr. Downe said that for the next five years, BMO will focus on helping Fullgoal to design and distribute domestic mutual fund products for Chinese investors.
Once the industry begins to mature, and necessary regulatory approvals are granted, the plan is to begin marketing Chinese funds to international investors, and then to introduce foreign investment products to China.
Mr. Downe declined to provide financial details of the transaction, but in Canada, fund companies can generally command a price tag equal to 10 per cent of their assets under management.
BMO, Canada's fourth-largest bank measured by market capitalization, forged an alliance with Fullgoal two years ago aimed at developing the fund management business in China.
Since then, the two sides have gradually negotiated a deal enabling BMO to become a part owner of the fund.
A total of 10 foreign companies were given permission in 2001 to strike partnerships with established Chinese fund companies, yet only BMO has managed to grab an ownership position.
Numerous other financial institutions, most recently J.P. Morgan Chase & Co., have been repeatedly frustrated in their attempts to buy into an existing firm.
Some, like ABN Amro Bank NV, have opted instead to invest in startup fund ventures with a Chinese partner.
Edgar Legzdins, president and chief executive officer of BMO Investments Inc., attributed BMO's success to its roots in China -- the bank opened an office in Guangzhou in 1955 -- and to cordial relations between the Canadian and Chinese governments dating back to the Trudeau era.
Mr. Legzdins said the bank preferred to buy a piece of an established company to avoid having to build a new operation from scratch, and face the difficult task of building infrastructure and creating a new brand.
Current regulations allow foreigners to own up to 33 per cent of a Chinese fund company, a number that is slated to increase to 49 per cent in a few years.
Mr. Legzdins said there will be an opportunity for BMO to increase its stake as the partnership progresses.
Fullgoal currently offers five different funds, and has applied for a sixth. BMO received regulatory blessings from the Chinese government last September to make its investment in Fullgoal, but the deal was only formally concluded this week.
© 2007 The Globe and Mail. All rights reserved.
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.