Across The Border

‘Fund of funds’ seen as the saviours of China’s mutual fund sector

CSRC approves first batch of six asset management firms able to launch FOFs last week, with some suggesting as much as US$121.5bn could now be ploughed into such products

PUBLISHED : Wednesday, 20 September, 2017, 4:59pm
UPDATED : Wednesday, 20 September, 2017, 8:45pm

China’s mutual fund industry may be charting a new course in future, into the fund of funds (FOFs) market, echoing the regulator’s calls to increase institutional buying on what remains the country’s largely arcane stock market.

An FOF is essentially one mammoth fund holding a portfolio of other investment funds – but it’s now being viewed as a potential game-changer in the mainland’s mutual fund sector, after enjoying 19 years of sizzling growth around the world.

The China Securities Regulatory Commission (CSRC) approved the first batch of six asset management firms able to launch FOF products last week, and market watchers now expect a floodgate of investment into the new investment product class, with some suggesting as much as 800 billion yuan (US$121.5 billion) could be ploughed into such products.

The first six houses – CCB Principal Asset Management, China Asset Management, Harvest Fund Management, China Southern Fund Management, HFT Investment Management and Manulife Teda Fund Management – were given the green light to launch the new FOFs within six months.

And some 30 fund management firms have now filed applications with the CSRC for launches of their own.

Fund of funds, often referred to a multi-manager investments, do not invest directly in stocks, bonds or other securities, but mandate asset allocation to other fund managers, who might be able to offer a variety of investment strategies.

The key points here are they allow broad diversification, appropriate asset allocation with investment experts in a variety of fund categories – appealing especially to small investors who want to get better exposure with fewer risks, compared with directly investing in securities.

“Technically, FOFs help diversify risk and look to make long-term returns,” said Wang Feng, chairman of Shanghai-based financial services company Ye Lang Capital.

“But as they charge higher management fees, it remains to be seen whether they will be well received by mainland investors.”

The higher fees are a result of investors effectively being charged twice, by the FOF and the

underlying funds.

China’s mutual fund industry was only launched in 1998 when the securities regulator took the tentative step of introducing institutional buying on the country’s roller-coast stock market.

Before then, Chinese stock exchanges were dominated by individual traders chasing quick returns, often buying on little more than rumours and hunches – many investors crashed and burned, amid regular boom-to-bust cycles.

But over the past couple of decades, the CSRC has been working much harder at encouraging institutional buying, in an effort to stabilise and settle, what at times still remains a volatile A-share market.

Foreign institutions have also been allowing in, buying A-shares via the QFII (qualified foreign institutional investor) and RQFII (renminbi qualified foreign institutional investor) schemes.

The country’s 116 mutual fund houses now manage more than 4,000 funds, with total assets worth 10 trillion yuan. But the market is still prone to wild fluctuations, and retail investors still account for most total market turnover.

FOFs were created in the United States in 1960s, and since their inception, pension funds have remained a major source of capital.

China’s National Social Security Fund, a reserve fund used to supplement local pension pools, is a typical fund of funds, which mandates part of its assets to mutual funds, private equity funds and other institutions, in pursuit of stable yields, over the long term.

The CSRC first started mulling over plans to nurture the growth of FOFs last year, after the shock stock market rout of mid-2015, triggering a serious crisis of confidence not only in the A-share market, but sending shock waves throughout markets around the world.

China’s mutual funds have been suffering a brain drain in the past decade, with hundreds of managers jumping ship to hedge funds, which offer higher pay and perks.

At the beginning of this year, mutual fund houses were left red-faced after 40 of their guaranteed funds posted investment losses, with many net asset values crashing below offer prices.

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Guaranteed funds, chasing low-risk investments such as bonds, have gained some traction as at least they promise to repay investors their principals.

Last year just 67 stock-focused mutual funds were launched, compared to 109 the previous year.

Fundraising focusing on stock investments hit 22.3 billion yuan in 2016, accounting for a fractional 7.2 per cent of the total value, the 109 funds netted the previous year.

“Retail investors no longer regard mutual fund managers as the heroes of shares trading,” said Huatai Securities analyst Liu Qiaoyu, who adds that FOFs are likely to attract tentative investors, with appetites for low-risk returns.

Before 2008, mutual fund managers had been s lauded by retail investors as they proved to be nimbler than individuals at sniffing out golden investment opportunities.

Retail investors were confident that fund managers were the best qualified to find the diamonds-in-the-rough stocks, via access to valuable market information about listed companies.

But in May that year, a Galaxy Securities revealed that up to a third of asset managers running funds had less than a year’s experience, and since then retail investors have been patiently waiting for a product which can offer better diversify, and longer-term and safer returns.

The timing seems perfect for FOFs to step in and fill that void.