FINANCE: Jack Ma’s Yu’ebao Fund Gets Too Fat

Bottom line: Yu’ebao’s further lowering of investment limits shows the Ant Financial-owned fund is growing too unwieldy, and the company would be better advised to diversify its wealth management product portfolio.

Alibaba (NYSE: BABA) founder Jack Ma is quickly discovering that his super-aggressive promotional ways can sometimes yield too much success. That’s my quick assessment of the bottom line from reports that Yu’ebao, the phenomenally successful fund launched by Alibaba’s former financial unit Ant Financial, is further capping the size of individual investments it will take.

The new cap is being set at a relatively low 100,000 yuan ($15,000), and comes just three months after Ant set an initial upper limit of 250,000 yuan per individual Yu’ebao account. The limits are clearly being put in place to avoid Yu’ebao spiraling out of control, as the fund has already become the world’s largest just four years after its launch.

Before we go any further, we should backtrack a moment and recap the history of this fund and what it does exactly. Ma launched Yu’ebao as a money market fund in 2013, the idea being that people could use it to earn interest on idle money in their accounts on Alipay, Ant Financial’s biggest asset that is China’s largest private electronic payments service.

People not only liked the idea, but they wholeheartedly embraced it, moving massive amounts of money from their regular bank accounts into Yu’ebao, which generally offered higher rates of returns. That was partly due to the more lax regulatory requirements placed on Yu’ebao and other similar investment funds, compared with more stringent requirements placed on banks.

The flood of money into Yu’ebao created problems for Ant and its fund-managing partner, because the amount of money in the fund ballooned so quickly it became a bit unwieldy. At the end of the first quarter of this year, the fund had a staggering 1.14 trillion yuan in its coffers, or over $170 billion, making it officially the world’s largest fund. And the money kept flowing in, even as Yu’ebao’s original market-beating rates came down to earth and began to look less impressive.

Falling Returns

There’s not much detail to the latest reports saying the fund has now lowered its maximum deposit to 100,000 yuan, which point out that the return rates for Yu’ebao accounts have recently fallen below 4 percent. (Chinese article) The reports also point out that Yu’ebao now has more than 300 million users, and that the average one of those has less than 40,000 yuan in his or her account. They also add that anyone with more than 100,000 yuan in their account already won’t be affected by the new policy.

Before May, when the original 250,000 yuan limit was imposed, no limits were being put on the accounts. I’ve been following these industries for a while, and to the best of my knowledge this is the first time I can recall any kind of fund like this having to turn away money. But this just testifies to the extraordinary marketing power of Jack Ma, who can sell almost anything and whose Ant Financial is rapidly rising as China’s premier private financial services firm.

As to what this means for Ant and Yu’ebao, the answer is probably not too much. The reality is that Yu’ebao’s rates of return aren’t all that exciting anymore these days, and its ability to attract high-worth investors is probably as much due to its name as anything else. Plus, it’s relationship with Alibaba, even though the two have no equity connection, is probably leading people to put more faith in the fund than the hundreds of other similar P2P lenders in a wide range of financial health offering similar services.

We should close by pointing out that this latest news comes as Ant Financial, Yu’ebao’s parent, inches towards an IPO in either Hong Kong, China or both. Some were initially predicting such an offering could come this year, but now it’s looking like that won’t come until next year at earliest. Yu’ebao could be one of the IPOs major selling point. But this kind of imposition of limits also shows that the fund does have its own limits, and Ant might be better advised to diversify a bit more into other wealth management products.