The firm is in final stage discussions with its first overseas client, a regional financial institution, to offer the service throughout the region, according to Xuanji chief executive Zheng Yudong.
Zheng did not reveal the institution’s name.
Xuanji signed its first institutional client a year ago, initially targeting financial institutions that already had a customer base in the mainland.
Currently, its clients include Minsheng Securities, Anbang Finance and Harbin Bank, Zheng said.
The robo-advisory service was launched to individual clients roughly six months ago, he added.
Xuanji uses onshore mutual funds categorised into 13 asset classes to construct its portfolios. The whole process, from defining the client’s risk profile, screening investment products, to forming an asset allocation view, is fully automated.
The resulting portfolio generally includes five to seven asset classes with one or two mutual funds in each. It is also globally diversified, thanks to the use of onshore Qualified Domestic Institutional Investor (QDII) funds that can invest offshore, Zheng added.
“In the more aggressive portfolio, about half of the holdings are allocated to overseas markets at the moment,” he explained, noting that the domestic markets were relatively weaker.
“We prefer using tracker funds,” Zheng noted, which mimic closely the benchmarks used for the portfolio construction and incur lower costs.
In general, ETFs are also preferred as they can be traded more frequently with cheaper costs, he continued.
“At the moment, mutual funds are the most efficient products to use in China,” said Barry Freeman, co-founder of fintech startup Pintec, Xuanji’s parent.
“Over the long run, there’s no doubt that ETFs are a good alternative, as they can give direct exposure to a certain asset class,” he told our sister publication Fund Selector Asia in Hong Kong last week.
Pintec also operates Hongdian Fund, a online fund distribution platform which provides mutual fund data to Xuanji.
Xuanji automates the portfolio allocation by applying artificial intelligence techniques to different sources of data, Freeman said. “But it’s more about understanding the risk profile of each individual, and making sure it matches the risks of the resulting portfolio.”
The portfolio is monitored around the clock, although actual rebalancing occurs usually once a month, to limit the turnover costs, explained Zheng. “It would be adjusted more frequently when the market is in a risk-off mode.”
The majority of clients invest between RMB30,000 and RMB50,000 (£5,680, $7,402, €6,420). So far, about 20% of users have dropped out, which is not a bad result compared to other internet finance products, he noted.
The average holding period of a mutual fund in China is six weeks, according to Gregory Gibb, chairman and chief executive of Lu.com, an online wealth management platform backed by Chinese insurance giant Ping An.
The robo-advisory market has garnered much interest in the mainland after China Merchants Bank, the biggest non-state-owned bank launched a robo-advisor last December and swiftly gathered RMB 3bn of assets.
The type of service has also raised regulatory concerns. In April, the China Securities Regulatory Commission (CRSC) called out two robo-advisors, Licaimafang and Latte Bank, for failing to obtain a mutual fund sales licence, according to its online statement (in Chinese).
In addition to requiring a mutual fund sales licence, the regulators have been focusing on investment disclosure, to make sure investors fully understand the risks and the privacy of data use, said Freeman.
As of September 2016, CRSC data shows that there are 107 licensed third party distributors of retail funds in China.