Players trail but gain marks for long-term focus

PUBLISHED : Tuesday, 12 February, 2008, 12:00am
UPDATED : Tuesday, 12 February, 2008, 12:00am

Qualified foreign institutions trading A shares failed to beat their mainland counterparts last year in terms of fund performance, but analysts still give them credit for their long-term investment strategy.

Riding a dream run on the mainland's red-hot equity market, qualified foreign institutional investor funds reported an average gain of 123.54 per cent in net asset values, according to Lipper. That was 19 percentage points lower than the mutual funds run by domestic managers. At the end of last year, 20 QFII funds managed total assets worth US$8.18 billion.

'QFIIs failed to beat the mainland funds, but their styles are different,' said Zhou Liang, Lipper's head of Chinese research. 'The QFII funds picked stocks with a long view.'

The Morgan Stanley China A-Share Fund topped other foreign funds with an annual return of 174.38 per cent, according to Lipper. The Shanghai Composite Index in that time jumped 96.66 per cent.

The mainland introduced the QFII scheme in May 2003, with regulators keen to import western-style equity investment practices to the arcane home market. Beijing hoped qualified foreign institutions could help domestic investors learn that quality stocks were good buys.

The move was symbolic rather than substantive, with the foreign exchange authority limiting investment to a combined US$4 billion quota for select institutions.

But when UBS Warburg, the first QFII approved by Bejing, placed four small orders for shares in Baoshan Iron & Steel, ZTE Corp, Shanghai Port Container and Sinotrans Air Transport, it changed the landscape of the nation's equity industry.

Other investors were encouraged to buy well-established money spinners, rather than small-capitalisation firms for a fast buck.

The State Administration of Foreign Exchange raised the QFII quota to US$10 billion early last year and announced in December it would be further increased to US$30 billion.

But QFIIs still play a small role in the fast-expanding mainland market. The home-grown China Harvest Fund Management had assets worth 206 billion yuan at the end of last year, more than triple that invested in QFII funds.

And foreign investors are still cautious about prospects in the world's fastest-growing major economy. Lipper said last month that investors were pulling money out of QFII funds at a remarkable rate, signalling 'the cautious attitude of global investors to the A-share market'. Between January and November last year, seven funds surveyed by Lipper saw net redemptions of US$2.2 billion.

By Tuesday, the last trading day before the Lunar New Year holiday, the Shanghai benchmark had tumbled 12.58 per cent from last year's close.

'Regardless of how impressive the full-year figures may be, fund managers will need to start the new year with a dramatic change in mindset,' fund researcher Z-Ben Advisors said. 'For 2008, firms will need to focus on asset retention, not just gathering.'