Mainlanders lose faith in mutual funds
Daniel Ren in Shanghai
The mainland's mutual fund industry is at a crossroads, after years of breakneck growth. The once-prestigious money managers are getting a rude reminder from investors: don't take our business for granted.
The number of equity investment funds is soaring. China's 60-odd fund management firms are expected to launch an aggregate 150 new funds this year, benefiting from the regulator's efforts to encourage institutional buying rather than retail investment, which has helped make the stock market a roller coaster.
But to the amazement of professional asset managers, volume is dwindling. Total fund shares have decreased as redemption of existing products has outdone subscriptions of newly launched funds.
According to the Securities Times, the mainland's mutual funds will number 700 by year end, compared with about 560 at the end of last.
The successful launch of 120 new funds so far this year helped fund houses, issuing shares at 1 yuan (HK$1.16) each, raise more than 300 billion yuan of fresh capital.
However, the total subscriptions of mutual funds as of September 30 this year stood at 2.4 trillion yuan, 60 billion yuan less than the volume at the end of last year.
At the end of 2007, total assets under management by mainland fund houses was 3.3 trillion yuan.
'Mutual fund managers have received a cold shoulder from investors, as they have doubted the professionals' investment skills and ethics,' said Bohai Securities analyst Zhou Xi. 'It is time for the industry to engage in introspection.'
The securities regulator has accelerated approvals of new fund launches since 2008, when the market was mired in bearish sentiment amid the global financial crisis.
New fund issuance has long been used by Beijing as a tactic to bolster the stock market when the regulator has struggled to shore up investor confidence.
The mutual fund companies under direct oversight by the China Securities Regulatory Commission (CSRC) have also been regarded as one of the main stabilising forces in the market.
By year's end, the total number of mutual funds is likely to be double the 346 at the end of 2007.
But the explosive growth in numbers has led to greater investor concern about a lack of talent in the sector, where there has been a severe brain drain.
Dozens of experienced money managers have jumped ship to hedge funds, attracted by better pay packages in recent years. The fast expansion of mutual funds has prompted them to use what retail investors call 'baby managers' - those who have little experience running multibillion-yuan assets - to fill vacancies left by star managers.
According to Wind Information, at least 10 newly promoted fund managers had no asset management experience before this year.
Analysts say the mutual fund industry has a labour shortage, because the current talent pool is not big enough to support the rapid growth in the number of funds.
Presently, only five managers hired by the 60 fund houses have experience of more than 10 years, including Wang Yawei of China Asset Management, one of the most prominent star managers.
About one-third of the 583 mutual fund managers nationwide had less than one year's experience in running mutual funds, Economic Information Daily said.
Mainland managers have an average 2.7 years' experience in managing funds, compared to five years in the United States.
The CSRC stipulates that anyone with three years' experience in the securities industry can be eligible to be a mutual fund manager. But that includes experience of analysts or research staff at the brokerages, who can be designated to manage the multibillion-yuan funds even though their experience does not include fund management.
Suspicions of fund managers' ethics heightened recently as Beijing intensified a crackdown on insider trading, with rumours about investigations involving star managers, including Wang. Earlier this month, rumour had it that China Asset Management's chief executive and Wang were under investigation for illegal activities, though the Beijing-based company denied it.
Sun Chao, an analyst at Kingsun Investment Management, explains. 'Wang Yawei was always a step ahead of others in investing heavily in those dark horses that brought handsome returns to the funds managed by him,' he said.
'It is reasonable that the regulator should conduct a probe into his practices to clarify.'
In late 2008, a Galaxy Securities report found that the performance of mutual funds on the mainland had almost nothing to do with those who managed them. The report was based on the track records of mainland funds over five years. It said that different strategies made little difference to performance.
Total fund shares have decreased because of redemption of products
The total subscriptions, in yuan, of mainland mutual funds as of September 30 this year stood at: 2.4tr yuan
That was this much less than the volume at the end of last year: 60b yuan
At the end of 2007, total assets under management by fund houses was: 3.3tr yuan