New Fund Offerings Flood China as Redemptions Surge
These are challenging times for mutual-fund managers in China. They are struggling to retain investors, who have redeemed more than 1 trillion yuan ($150 billion) in holdings over the last two years. Investors have been trading in and out of mutual funds like stocks, and in the wake of the financial crisis have shown very short time horizons for their holdings.
In response, fund management companies are littering the market with new offerings. Last year saw a record number of new fund launches in the mainland – matched by a record amount of money moving out of mutual funds in redemptions in the last quarter of the year.
According to fund tracker Z-Ben Advisors, investors took out a net 140 billion yuan ($21 billion) in the fourth quarter alone. And money moved out of mutual funds in every quarter of last year, even when taking subscriptions into account, leading to a full-year figure of 448 billion ($68 billion) in net redemptions.
“It’s one of the key problems that fund managers haven’t been able to solve over the past couple of years,” Ivan Shi, the senior associate at Z-Ben Advisors who helped compile the figures, said.
Thanks to market gains, total assets under management rose 4.6 percent in the fourth quarter, leaving Chinese mutual funds with 2.5 trillion yuan ($380 billion) in assets under management at the end of last year. But the full-year figure on redemptions amounts to a 15 percent decline, in organic terms, after stripping out any market moves.
Factoring in market performance, the overall decline in assets was 5.7 percent for the year. While massive, the full-year figure on redemptions, wasn’t a record — in 2009, investors took a net 587 billion yuan ($89 billion) out of mutual funds.
“Overall in the past two years we have seen very big redemptions from mutual funds, and it is harmful to the operation of mutual fund managers,” Shi said. “Both when the market rises and when it drops there are redemptions.”
What’s going on? The volatile markets during and after the financial crisis have caused Chinese investors to treat mutual-fund investments as speculative plays.
So those massive redemptions in 2009 came as the benchmark CSI 300 index climbed 94 percent for the year – after a 2008 in which it lost 65 percent. Investors who were burned with crisis-induced losses redeemed as soon as their holdings got back to par.
Last year, investors took quick profits if they saw short-term gains – meaning there have been hefty redemptions whenever markets move up. The CSI 300 lost just under 14 percent in 2010, with losses in the first half of the year and gains in the last six months.
Faced with that hollowing out of the assets in their existing funds, fund managers have rolled out new funds in a bid to tempt fresh investment. The amount of mutual-fund launches was a record both in the fourth quarter, when 47 new funds launched, and for the full year, with 136 new mutual funds on the market.
The raft of new launches has been aided by moves by China’s stock watchdog, the China Securities Regulatory Commission (CSRC), to liberalize the product-approval process. Fund managers now have six channels of fund approval, depending on the type of product, and so often apply to launch a range of products with the CSRC at the same time.
Yinhua Fund Management, for instance, launched three new funds in the fourth quarter, with a balanced fund, a bond fund, and a commodities fund of fund that’s a Qualified Domestic Institutional Investor (QDII) product, able to invest outside China. With the new launches, its market share rose to 3.4 percent at the end of 2010.
The vast majority of Chinese funds are domestically focused. QDII funds developed a very poor reputation after the first launches came on the market at the peak of the market, and then were slammed by the financial crisis.
But fund managers are now seeing some success in launching new QDII products, if they offer exposure to assets investors can’t access easily in China. Commodities are particularly hot, as are any products that offer an inflation hedge – deemed the biggest current threat to China’s rapid expansion.
Mainland fund house Lion Fund Management Co. introduced the Lion Global Gold Fund late last year, and said within a month that it had already maxed out its quota at $500 million, or 3.2 billion yuan, The fund will invest in physically backed gold ETFs listed overseas.
By contrast, the average fund raising for QDII product launches is one-fifth that tally, at only 600 million yuan. Besides the early poor performance, Chinese investors are also concerned that returns from dollar-denominated funds are eaten away by the steady appreciation of the yuan.
Z-Ben faults many of the 63 mutual fund companies – around half of them Sino-foreign joint ventures – for chasing short-term performance and ignoring customer service and stability. Portfolio and staff churn are high.
“Usually after six months, they can’t sustain the performance and the outflows out of the funds are very huge,” Shi said. Notable exceptions, he added, are HFT Investment Management and CITIC Prudential, which seem to be achieving stable growth.
New regulations are in the offing for fund managers, aimed at improving their corporate governance after scandals involving front-running scandals and incidents of major shareholders meddling in the running of companies. The prospective rules are now doing the rounds of senior fund managers for feedback. It’s not yet clear what form they’ll take – they’re likely to go into effect in the second or third quarter.
Most significantly, the new fund management law may allow asset managers to invest in private equity. It’s also likely to increase the CSRC’s oversight of fund managers, with greater penalties for companies that break the rules.
Another likely outcome is the legitimization of private funds, which are expected to come under the CSRC’s mantle as long as they meet certain criteria. Since the biggest private fund managers such as Chongyang, Star Rock and Zexi Investment Management are already larger than the smallest fund managers, that would add yet more pressure for managers looking to raise money.
“Given how competitive private funds have proven to be in the wealth-management segment of the market, the potential for large private managers to go after FMC’s core business should send a chill down most public fund managers’ spines, particularly those at smaller firms,” Z-Ben stated in a paper on the new rules.