Mutual fund industry to maintain momentum
By Chen Yao (China Business Weekly)
Updated: 2004-06-01 14:22

China's mutual fund industry is poised to resume its rally, despite the bearish mood hovering over domestic markets and the possible slowdown this year of the country's economic growth.

"We believe China's stock market is entering an era of mutual funds. And the country's securities regulators have spared no effort in liberating the market's investment rules on mutual funds," said Marc Tan, manager of China Merchants Xianfeng Fund, China's first-ever joint-venture fund.

"The fund industry has ample reason to boom now, and to maintain that momentum for the next decade or longer."

China's top policy-makers signalled last week the country's mutual fund and insurance companies will soon be allowed to invest overseas -- which will help them diversify portfolios, cultivate investment skills and, of course, earn better returns, analysts said.

China's mutual funds, under the proposed qualified domestic institutional investor (QDII) scheme, will both gain from investing in the world's fastest-growing emerging market and enjoy less fluctuation in buying stocks in developed economies, Tan said.

"All of these possible factors will drive the mutual fund industry ... and eventually benefit the fledgling market in return," he said.

China's mutual fund industry has boomed during the past two years, and has become the main driver of share prices in the domestic market. The industry is currently managing assets worth nearly 250 billion yuan (US$30.2 billion), CSRC statistics indicate.

The latest market rally began earlier this year. Mutual funds, branding professional investment techniques and lucrative gains, have stepped up efforts for initial public offerings (IPOs).

In the year's first quarter, altogether 19 new fund companies sold fund units worth 98 billion yuan (US$11.84 billion), which far exceeded last year's fund IPOs.

China Securities Regulatory Commission (CSRC), the industry watchdog, expected earlier that the annual growth of new fund IPOs will be limited to 100 billion yuan (US$12.08 billion) this year.

The fast expansion of China's mutual fund industry is proceeding hand-in-hand with the market's bullish run, said Liu Jingde, a senior securities analyst with Beijing Securities Co.

"But as the market is experiencing a short- to medium-term shock, funds with lower gains will be sieved off to give way to those that perform better."

Forty-three open-end funds have secured their positions by gaining profits from last year's market downturn, while the other seven funds suffered losses, indicate the funds' already-published annual reports.

Of the 104 equity funds in China, the 13 best-managed funds have posted more than 2 billion yuan (US$242 million) in combined profit.

Eight funds underperformed, and lost an average 100 million yuan (US$12.08 million).

The market's recent fall, spurred largely by concerns of possible interest rate hikes and the anticipated economic slowdown this year, has weighed on mutual funds' investment returns, Liu said.

Many of the mutual funds, which proceeded with IPOs in the year's first quarter, have more or less lost money in the market's tumble, he said.

Forty-one open-end securities funds have seen nearly 7.17 per cent of their value wiped out since the beginning of April. Meanwhile, the stock market fell about 9 per cent.

The benchmark Shanghai Composite Index, grouping hard-currency B shares and yuan-denominated A shares, edged down to around 1,510 points from its March peak of 1,783 points. The Shanghai T-bond index shed about 6 per cent during the same period.

"As the market turns against you, there is no way to escape unscathed, especially in a market without adequate hedging opportunities," Tan said.

A recently debuted fund, being managed by CITIC Fund Management Co, reported returns of -1.64 per cent for last month, although the fund's total value exceeded 10 billion yuan (US$1.2 billion).

"For large-cap funds, foresight is the most important factor in outperforming the market in the long run," said Ding Kan, investment director of CITIC Fund Management Co.

The overheating of some sectors -- including real estate, steel and cement -- has jeopardized the economy's overall health. Expectations the central bank will soon raise interest rates have dampened investors' sentiment.

Although many mutual funds have started holding more cash than in the past, the percentage of their investments in securities remains high, Ding said.

The only difference is most mutual funds have dumped stocks categorized by policy-makers as segments of the overheating sectors and subjected to strict regulations, he said.

The stocks had been the funds' favourites over the past two years.

"Now, mutual funds have enlarged their investment scope to include large-cap blue chips from sectors such as pharmacy, electronics and transportation," he said.

Large-cap stocks tend to generate more stable returns when the market falls, while small-cap stocks will prioritize fund managers' buy lists when the market rallies, Tan said.

China Merchants Fund, along with many others, considers the recent decision to launch a second board a great opportunity to boost investment results, if the market rebounds, he said.

China's securities watchdog earlier this month approved the resumption of a stock-trading board in the Shenzhen Stock Exchange.

China Merchants Fund is optimistic about the stock market's future, especially as more funds -- due to the lack of other investment channels -- are continuing to stream in, he said.

Chinese residents had a combined 11.2 trillion yuan (US$1.4 trillion) tuck in bank accounts at the end of April, up 17.8 per cent from a year earlier, indicate central bank statistics.

China Merchants Fund is among the five best-known fund management groups in China. The others are China Asset Management Co, Guotai Asset Management Co, China Southern Fund Management Co and Great Wall Fund Management Co.