Unstable market conditions have forced Fortis Haitong Investment Management to reconsider the strategy of a new mutual fund planned for launch under China’s Qualified Domestic Institutional Investor (QDII) scheme.
Fortis Investments’ Shanghai-based joint venture fund management company, which runs €6.3bn of assets, is due to roll out its China Offshore Enhanced Fund. The original aim was to replicate the investment strategy of the Fortis Haitong-advised Hanhwa Green and Dream Fund, which was launched by South Korea’s Hanhwa Investment Trust Management to invest in Chinese companies listed on overseas stock exchanges. But with that plan now under review, Tian Rencan, CEO of Fortis Haitong, says: “A number of factors are yet to be analysed and understood before any meaningful conclusion can be drawn.”
Fallout continues
Fortis Haitong may not be the only Sino-foreign fund manager to rethink product strategy as the fallout from the US subprime mortgage crisis continues its uncertain and unsettling course. According to the January report 2007 Results, The good news and the not-so-good news by Shanghai-based consultants Z-Ben Advisors, investment managers launching QDII mutual funds in 2008 will have to fight hard to win and retain assets in volatile market conditions.
The report predicts a “dramatic rise” in the number of competing QDII mutual funds. The recent launch of the ICBC Credit Suisse China Global Opportunity Fund is due to be followed soon by the roll-out of the Fortune SGAM China Offshore Growth Fund and the Fortis Haitong China Offshore Enhanced Fund, bringing the number of individual QDII mutual funds to seven.
A total of 14 fund management companies have been issued with QDII licences by the China Securities Regulatory Commission (CSRC). To date, six QDII products have been issued, including the experimental product by Hu’an Fund Management. Z-Ben expects around 12 QDII mutual funds to be launched in the coming months.
But turbulent markets have hit the value of previously launched QDII products and raised fears that managers are in for a fitful year of slow inflows and rapid redemptions. Z-Ben points to the poor performance of the four QDII mutual funds that were launched in 2007 – all have suffered an investment loss.
Notable among these is the Southern Enhanced Global Balanced Fund. Managed by Southern Fund Management in conjunction with BNY Mellon Asset Management, the product attracted $8bn in subscriptions from Chinese retail investors before launching at a capped at $4bn in assets. Since launch, it has posted a negative return of -6.30 per cent.
However, despite being open to redemptions since the end of 2007, the fund has not suffered outflows. Z-Ben says investors simply might be refusing to redeem their shares at a loss and that the real test of investor commitment will come when the net asset value (NAV) of this and the other QDII funds goes above par value of Rmb1.00 per share.
Signs that asset managers will struggle to attract money was evidenced by the fact that unlike previous QDII offerings, the ICBC Credit Suisse China Global Opportunity Fund failed to fill its approved quota of $3bn in the first day. This quota was $1bn less than that granted to the first four QDII funds. ICBC Credit Suisse Asset Management was the fifth Chinese investment management firm to launch a fund under a scheme that allows Chinese investors to buy foreign assets.
The combination of disappointing QDII fund performance to date, an uncertain market outlook and a steady influx of new product providers spells tougher conditions for all players this year. Noting that 2007 is certain to be remembered as being the most profitable year for the Chinese fund industry, Z-Ben warns that growth will moderate this year.
Growth to slow
The report reveals that last year, assets under management (AUM) rose from Rmb856bn ($119bn) to Rmb3273bn – an increase of 282 per cent. Most of these assets are allocated to equity funds, which charge annual management fees totalling 150 basis points. In 2008, the rate of growth is expected to slow with AUM projected to be Rmb4600bn by year-end.
Moderating growth is expected to squeeze both profits and margins in 2008, but Z-Ben says the bottom line may be further affected by a projected rise in the costs incurred by the fund manager, chiefly rising remuneration packages.
2007 will also go down as the year that mutual fund investing took root among retail investors, with Rmb1000bn-worth of bank savings flowing into investment funds. Last year also saw investors switching in and out of funds less, but a return to higher rates of “churning” between funds is expected if volatile market conditions persist.
In order to compete successfully in a more challenging investment environment, asset managers will have to focus not only on achieving consistently high performance but also on delivering good client and investor servicing. The report says: “Regardless of a slowdown in growth, investors will still be keen to buy into the industry’s best-performing products. At the same time, a strong track record will also depress the likelihood of an investor paring back on positions in one manager’s product and reallocating the proceeds into the product of a rival.”
Joint venture fund management companies lost market share to their domestic rivals during 2007, with Z-Ben pointing out that investors no longer care if an asset management firm is domestically owned or a Sino-foreign partnership: “Today, variables such as performance, brand awareness, investor education and not the ownership structure, play a more important role when investors are making the choice over where to allocate their capital.”
Competition among Sino-foreign fund houses is set to become more intense as new joint venture operations enter the fray.
Z-Ben’s league of Sino-foreign players ranks Invesco Great Wall Fund Management as the only asset manager with AUM of more than Rmb100bn. China International Fund Management (a joint venture between JPMorgan Asset Management and Shanghai International Trust and Investment Company) and Fortune SGAM Fund Management are ranked second and fourth respectively. The dramatic growth in the Chinese stock market in the first nine months of 2007 is reflected in the steep rises in AUM achieved by all Sino-foreign fund managers last year.
Denis Lefranc, CEO of Shanghai-based Fortune SGAM Fund Management, which manages $9.53bn of mutual fund assets for Chinese investors, agrees that the pace of growth of the QDII mutual funds business will depend on the domestic stock market’s capacity to keep posting outstanding returns.
He adds that other factors influencing growth this year will include the resilience of the US, Europe and Japan to the financial crisis triggered by the collapse of the US subprime mortgage market and the pace of Chinese yuan appreciation against major other currencies. “A consolidating domestic market, along with a few successful QDII products and resilient markets overseas, could make this product class a huge success. But strong domestic markets and sluggish US and European stock markets could also postpone this success,” he comments.
Pointers to success
According to Mr Lefranc, to be successful, a QDII fund will have to meet several of the following requirements:
- A brand name associated with overseas investment expertise (which should favour the joint venture asset management companies);
- A product name/investment theme/marketing pitch that appeals to Chinese investors;
- Successful market timing;
- A committed distribution network into these products, which also means internal training as most of these products are new in many aspects to distributors and investors;
- A measure of good luck in terms of absolute performance in the first few weeks or months as Chinese investors would not understand that mature markets could significantly drop.
 | Eddy Belmans, regional general manager, North Asia, at ING Investment Management, observes that whereas institutional investors are more easily convinced of the merits of diversification and of buying on weakness, retail investors in China largely still prefer to buy into proven upward market trends, seeking high absolute performance. |
He says: “For a QDII provider, launch timing might therefore become essential to a successful fund raising. At the same time, one structural obstacle to overcome is the expected appreciation of the yuan renminbi. The Chinese investor expects that investing in foreign currencies will already make them incur a 5 per cent-plus currency loss over the year to start with. This can be compensated for by high equity market returns, but not in the current global investment climate.”
He adds that for upcoming product launches, the significant NAV declines of QDII funds launched in the last quarter of 2007 will prove a major marketing handicap. However, it might help to maintain assets in the funds already launched that trade below par, as investors will not want to sell at a loss.
In the medium term, Mr Belmans says success will start to depend increasingly on product differentiation, both in terms of where/what the fund invests in (thus far very Hong Kong-focused) as well as in terms of track record.
New launch
ING’s joint venture fund management company, China Merchants, received a QDII licence at the end of December and is currently preparing to launch a new product.
Bank of Communications Schroder Fund Management is aiming to launch a QDII product within the next three months subject to CSRC approval. William Cheng, its new QDII product manager, says he will be running a global equity fund with the flexibility to buy bonds in a bear market. The fund will aim for good stock picks within three investment themes: ageing, global warming and participation in the growth of China and India.
Mr Cheng warns that asset managers will face strong competition this year from the QDII products launched by banks, brokers and insurance companies. “The negative returns from the first four QDII products will stop investors making further investments for the time being. However, if worldwide stock markets start to outperform the local equity market, investors will return and realise the benefits of diversification,” he says.
