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Christine Chan

An open-ended fund with a cap - a five billion yuan (about HK$4.68 billion) first for the mainland - is set to launch next month with expectations it will attract demand for 'several times' the number of units available.

JP Morgan Fleming Asset Management, advises Huaan Fund Management, the Chinese fund manager which won the coveted mandate to the fund -  the Huaan Innovation Fund.

JP Morgan is the global parent of Asia-based JF Asset Management. Yesterday its managing director, Blair Pickerell, said the Huaan Innovation Fund was 'more or less ready to go', with just 'a few things' to be decided by regulators.

Among the major issues to be resolved is establishing the best and fairest allocation method in case of an over-subscription - without creating social instability.

'I guess [the fund] will be launched in August,' Mr Pickerell said, pointing to the repeated system testing and model adjustments.

This week, JP Morgan extended a technical agreement with Huaan with a memorandum of understanding - agreeing to take an equity stake in Huaan to establish a joint venture mutual fund business in China as permitted under the law.

Foreign firms are confined to offering advice to Chinese firms but they will be allowed to take up a third of the equity of fund management firms when China joins the World Trade Organisation, rising to 49 per cent after three years.

Beijing is keen to expand its fund-management industry with open-ended funds, which have no size limitation.

Existing closed-end funds are limited to a fixed number of shares.

However, this first open-ended fund is a bit of a hybrid, capped at five billion yuan to cushion stock market instability created by the inflow and outflow of funds.

As well the Huaan fund will not allow redemptions within the first three months of the fund's launch.

Open-ended funds need to sell and redeem shares continually and foreign firms' expertise will be crucial to their operation.

'An open-ended fund is very different from a closed-end fund. It is like a bank in dealing with people's money,' Mr Pickerell said.

'What happens after you raise the money? How are you going to produce statements for clients? How are you going to produce information for clients?

'What happens when they have brought a hundred questions when the stock market goes down three days in a row and they are thinking of redeeming and they're calling and you can't answer the telephone and you can't answer their questions, and you can't find their account balance? It's just like a bank.

'Nobody will let you open a bank and collect money until you can prove you can do all the pieces.'

A year had been spent on testing of subscription, redemption and statement production.

Mr Pickerell was confident that the fund would be 'heavily subscribed', with its investment portfolio comprising 80 per cent of mainland domestic A shares and 20 per cent put into domestic bonds.

Retail investors would account for 60 per cent of the total take-up of the fund, with institutions subscribing to the rest.

However, Mr Pickerell insisted greater efforts were needed to educate mainland investors on the advantages of mutual fund investments.

The upcoming launch of the open-ended fund has come despite the bleak first-half performance posted by mutual funds after a widespread government crackdown on the industry.

The sector was dogged by a six-month regulatory probe on price rigging in the wildly speculative domestic stock market.

More than a third of 33 closed-end mutual funds saw their net assets shrink in the first half.

The mainland officially has 36 closed-end mutual funds operated by 14 fund management companies.



Initial open-ended investment on track for launch next month