MUTUAL FUNDS
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Investing

Red faces all around as 11pc of China funds fail to meet guarantees

Woeful performance prompts securities regulator to better police what many believe to be an already arcane part of the wealth management market

PUBLISHED : Monday, 13 March, 2017, 4:11pm
UPDATED : Tuesday, 14 March, 2017, 9:07am

Mainland mutual fund houses have been left red-faced after 40 of their guaranteed funds posted investment losses, with net asset values falling below the offering price of 1 yuan (14 US cents) per share.

The woeful performance of the bond-focused funds – designed to chase low but stable yields – has now prompted the securities regulator to better police what many believe to be an already arcane part of the wealth management market.

According to East Money Information, a Shenzhen-listed online financial information provider, nearly 11 per cent of the total 183 offered funds – which at least guarantee the repayment of principal – are potentially loss-making.

“A bearish bond market could ratchet up pressure on the fund managers to repay the principals,” said Gu Weiyong, chief executive of hedge fund company Shanghai Ucon Investment.

“Fund managers are facing hard times and are required to be extremely cautious to avoid any losses arising from corporate bond defaults, and sharp falls in bond prices.”

China’s mutual fund companies started launching guaranteed funds in 2003 to attract investors with lower-risk offerings. To date, not a single one has failed to repay investors the principals.

Last year, more than 80 guaranteed funds managed by mainland mutual fund houses hit the market, buoyed by mounting interest in low-risk investment products amid a slumbering stock market.

However, the guaranteed funds have taken a beating from the volatility of the mainland bond market in the fourth quarter of 2016, as bond prices fell sharply amid speculation the US Federal Reserve would increase interest rates.

The Chinese central bank’s move to withdraw liquidity from the money market and worries about bond defaults exacerbated the bond market’s weak sentiment.

On December 15, benchmark treasury futures for March delivery tumbled by their daily trading limit of 2 per cent, amid a record sell-off on the mainland bond market.

China’s government bonds tumble after US Fed’s hawkish inflation outlook

The expected interest rate rise could drive up bond yields, and help knock down prices because interest income derived from bond investments is set at a fixed rate.

Among the biggest losers, Penghua Jinxin – a guaranteed fund operated by Shenzhen-based Penghua Fund Management – has reported a per share net asset value of 96.4 fen on Friday, which means it lost 3.6 per cent of its principal.

Mainland mutual funds are offered to the investing public at 1 yuan apiece. A combined more than 300 billion yuan of capital are now under the management of the country’s mutual fund firms.

Two guaranteed funds managed by Shenzhen-based Lion Fund Management – Lion Lixin and Lion Jingxin – are likely to become the first funds of their kind to fail to protect the principals when they expire at the end of this year.

A bearish bond market could ratchet up pressure on the fund managers to repay the principals. Fund managers are facing hard times and are required to be extremely cautious to avoid any losses arising from corporate bond defaults, and sharp falls in bond prices
Gu Weiyong, chief executive of hedge fund company Shanghai Ucon Investment

Lion Lixin’s net asset value was valued at 99.6 fen a share while that for Lion Jingxin was 99.7 fen on Friday.

According to existing rules, the fund management firms would have to cover the losses from guaranteed funds and pay back investors the balance, if the funds’ value falls below the fundraising amount.

In February, the China Securities Regulatory Commission published draft rules governing guaranteed funds to solicit public interest and opinion, banning new funds that did not guarantee repayment of principals, as a way of reducing asset managers’ exposure to risk.

Mutual funds face ‘nuclear winter’ in a flat market

“Mutual fund houses are having to brave rough weather as public investors are disappointed with their performance,” said Ivan Shi, the head of data analytics at Shanghai fund consultancy Z-Ben Advisors. “They will have to wait until a bull run on the stock market occurs.”

Last year, the mainland’s 110 mutual fund firms launched 67 stock-focused funds, raising 22.3 billion yuan in total, or 332 million yuan each.

That was in stark contrast to 2015 when they netted a combined 309.3 billion yuan, or 2.84 billion yuan each.

A stock market rout that saw the benchmark index dive 43.3 per cent in just six weeks after June 12, 2015 left a huge dent in buying interest for shares and mutual funds.

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