Managers of new funds have few excuses for failure

PUBLISHED : Friday, 11 June, 1999, 12:00am
UPDATED : Friday, 11 June, 1999, 12:00am

Ayear ago, in the early days of a pilot scheme to launch mutual funds, foreign fund analysts repeatedly warned about the dangers of the excessive premiums investors had paid for the units.

Much publicity was given to the new vehicles set up to provide retail investors a diversified and professional avenue to invest in the volatile markets.

Investors' unrealistic expectations and the novelty value of the vehicles drove the first closed-end funds - Jintai and Kaiyuan - up 60 per cent from their issue price of 1.01 yuan in just 10 days. Foreign fund analysts said the rise was too fast.

A year and 10 funds later, the novelty value has disappeared, as has much of investor interest. Securities regulators declared the scheme a success, but investors thought otherwise and voted with their feet.

The bombshell came about a year after the scheme's launch. In late April, when a new fund opened for public subscription, it attracted only 4.6 billion yuan (about HK$4.28 billion) in subscription monies. Three days later, another fund attracted 11.5 billion yuan.

What a far cry from a year ago, when Jintai and Kaiyuan, both capitalised at two billion yuan, attracted subscriptions of 160 billion yuan, or about 40 times over-subscribed. Why the world of difference? The obvious reason was the disappearance of the novelty value. Now, there are 10 state-approved funds, increasing the supply for investors and lowering the premium.

The more important explanation is that managers of the funds failed to deliver. They charge investors a flat 2.5 per cent of a fund's net asset value for the professional expertise, significantly higher than the 1-1.5 per cent charged for closed-end funds in Hong Kong and 0.5-1 per cent in the United States.

Few investors will complain if fund managers do well to justify the high fees. But no; when the markets were bullish, they did well, but not brilliantly, and when the markets slid, the funds did worse.

This led investors to ask: if the managers cannot do better than the markets, why should we pay them the exorbitant fees, reportedly among the highest in the world for closed-end funds? A fair question. Now, however, foreign fund analysts have said the mainland fund industry is just a year old, and one should not judge it too harshly. Tell that to the investors.

It is true funds are a long-term method of playing the market, and investors should not look just look at their short-term performances.

But until retail investors are prepared to look at funds that way, the 10 funds which make up the industry will just have to convince investors they are worth investing in - even in the short term - or their future will be in doubt.

Official promoters took fright on May 18, when Jinhong and Hansheng, the two funds that attracted relatively less in subscription monies a month earlier, closed below their issue price of 1.01 yuan - a record.

The message from retail investors was clear - deliver or we will vote with our feet.

Beijing took the message to heart. Early this week, it gave the mandate to the better performing of the 10 fund companies to launch a second fund each. This time, however, it wisely incorporated a performance-linked incentive to push fund managers to do well.

The yardstick is pretty stiff. Fund managers must, among other requirements, outperform the average return in the stock market and the return on one-year bank deposit by at least 20 per cent.

Managers of the two new funds have already received help - bank deposit rates were cut from yesterday, and the stock markets are bullish once again.

There are few reasons for them not to do well - except for their own lack of management skills. For the sake of the nascent industry, they had better deliver.