Advertisement
Advertisement

Foreign players face reality of cashing in

With all the hype of China's underdeveloped fund market being a goldmine for global players, large net redemptions of one of the earliest portfolios managed by a foreign-invested fund house were a natural headline catcher.

However, fickle investors, an unsophisticated securities market and limited distribution channels mean mass redemptions could afflict foreign players trying to put down a stake in China's underdeveloped fund market.

Dutch bank ABN Amro this week obtained regulatory approval to buy a 33 per cent stake in Beijing-based Xiangcai Hefeng Fund Management. When Xiangcai Hefeng's umbrella-style portfolio went on sale in March, it was billed as one of the funds managed by a Sino-foreign fund house.

The fund, which raised 2.63 billion yuan (HK$2.47 billion), shrank 35 per cent between its formation on April 25 and June 30 to a net asset value of 1.69 billion yuan. Much of that was due to a 34 per cent reduction in fund units to 1.71 billion.

Most of the 25 Chinese open-ended funds which have filed second-quarter reports this year shrank. At least eight portfolios suffered net redemptions of more than one billion yuan in the year to June 30, according to a Xinhua report.

'[But] this is a market reality that affects most players,' said David Lee, ABN Amro Asset Management's China chief executive.

The two years since Hua'an Fund Management launched China's first open-ended fund - which allows continuous redemptions - was marked by a sustained bear stock market, Mr Lee said.

'Investors therefore have not seen the benefits of open-ended funds,' he added.

Pessimism lingered about stock market outlooks, said Guotai Junan Securities analyst Tian Hongwei.

The recent rash of new share offers, including big issues such as those of Huaxia Bank and China Yangtze Electric Power, has stoked fears of a reversal of past regulatory practices of carefully spacing offers to avoid depressing share indices.

As fund performances improved this year after last year's poor showing amid a bear market, investors cashed in for fear of another downturn, said China Southern Securities analyst Wu Zhigang.

Chinese fund managers rely heavily on commercial banks to distribute to retail investors and corporates other than insurers. Regulatory approvals are needed for banks to distribute fund units.

In reality, eight Chinese lenders which have been licensed as custodian banks for portfolio managers form the main fund distribution channel to non-insurers, according to Wang Junfeng, chief market officer at Fortune SGAM Fund Management, a Shanghai joint venture of French bank Societe Generale.

While regulatory efforts to cultivate an institutional investment culture have propelled the growth of Chinese open-ended funds from none to 37 in two years, the gathering pace of new fund launches has strained the banks' capacities.

The low margin had been discouraging banks not qualified as custodians from joining the business, Mr Wang said.

However, Shenzhen-based China Merchants Fund Management (CMFM) - a joint venture of Dutch ING Group - is fortunate.

The Shenzhen-based fund has been able to count on its mainland shareholder, China Merchants Securities and the brokerage's sibling lender, China Merchants Bank, for long-term marketing support and a more loyal investor base, Mr Lee said.

Chinese fund launches, which typically raise billions of yuan each, are a strong enticement for foreign players looking into the market. But the anxiety to fill fund-raising targets has often forced fund managers and banks to turn to unstable sources of funding.

The resulting investor fickleness is aggravated by the fact that insurers and other companies account for half or more of fund subscriptions and tend to cash in before the interim and annual reporting season, analysts said.

Intensifying competition has also forced fund managers not only to raise dividends to attract investors but also resort to sweeteners such as slashed fees and shortened investment lock-up periods, hence exacerbating the exodus.

The small variety of investment instruments in the Chinese market further thwarted efforts to truly differentiate fund products to capture investor interest, analysts said.

These issues aside, early investment in the Chinese market with its huge savings and growing middle class is still a wise move.

'The medium to long-term potential remains very compelling, and it does make sense to get in the door sooner rather than later,' said Andy Mantel, managing director of Pacific Sun Investment Management (HK).

'The first foreign investors in Taiwan's fund management industry have done very well either via the accumulation of new assets under management or by selling their equity stake to others.'

Post