China probe of fund managers sparks exodus from industry

PUBLISHED : Monday, 19 May, 2014, 3:22am
UPDATED : Monday, 19 May, 2014, 3:22am

Beijing's stepped-up efforts to uncover unscrupulous fund managers have caused a huge brain drain in the mutual fund sector and could spark a new crisis in the mainland's arcane stock market.

About 120 asset managers at mutual fund houses have quit their jobs in the year so far, nearly double the number in the same period last year, according to data provider iFind.

Industry sources said the number would continue to increase rapidly in the coming months because of a widened investigation into fund managers, who used to sport the tag of "champions of wage earners" on the mainland.

The panic among the fund managers is widespread, three fund managers told the South China Morning Post.

"If the finding shows that nearly everyone is a bad boy, it will be difficult for the investors to trust mutual funds anymore," said Howhow Zhang, the head of research at fund consultancy Z-Ben Advisors. "It's up to the regulator to decide whether it wants to get rid of them."

The China Securities Regulatory Commission is now waging a campaign targeting nearly all the mutual fund houses, with each fund manager being questioned and investigated separately.

"The problem is serious," said a mutual fund house source. "It's an open secret that a majority of the fund managers have participated in 'rat trading'."

On the mainland, rat traders refer to fund managers who use their relatives' brokerage accounts to trade shares for them. They normally use the tactic of "churning" - the process in which fund managers engage in excessive trading to ensure they could earn money in their rat accounts.

CSRC chairman Xiao Gang, after taking power in March last year, strengthened the team of investigators as he was determined to weed out irregularities in the roller-coaster market.

One source close to the CSRC said the nationwide probe into the fund managers was different from previous investigations, which turned out to be "symbolic" rather than "substantive".

Before, the investigators randomly picked up asset managers for investigations or probed those whose unethical practices were reported to the regulator by industry sources.

Two of the three fund managers said they would choose to resign since the clean-up effort would eventually involve everybody. Since 2007, hundreds of fund managers on the mainland jumped ship to hedge funds as they were attracted by better pay.

Retail investors believed the mutual fund managers had the clout to sniff out prime investment opportunities as these funds notched handsome earnings during the bull run in 2006-07. An average fund manager could earn more than 1 million yuan (HK$1.24 million) a year.

Since 2007, investors began to cast doubts on the fund managers due to their woeful performances in the bear market while an increasing number of rat traders were spotted.

In Shanghai alone, the CSRC said at least four asset managers conducted rat trading. Among them was Zhong Xiaojing, a fund manager with HSBC Jintrust, who was found to have used rat accounts to buy shares worth 3.25 million yuan between July 2009 and January 2012.

Ironically, the rat accounts posted a combined loss of 84,500 yuan.