Chinese fund firms are set to be allowed to launch standardised funds of funds from this Friday in a regulatory shift designed to raise competition between product providers.
These products are expected to appeal to retail investors who find it difficult to select funds when faced with a wide choice. As of June, the country was home to 1,714 mutual funds.
Up until now, mutual fund houses have not been permitted to launch products invested into other mutual funds. But Beijing has stepped in, partly because similar hybrid products on the market have underwhelmed.
Securities houses have launched 46 hybrid products investing into other funds. But only half of them have reported positive returns, and the average return is -1.32%, according to data provider Eastmoney Terminal.
These products are not standardised. They include trust vehicles that invest in other trust products. Their investment thresholds of about Rmb1 million ($162,000) mean they are the preserve of high-net-worth individuals (HNWI), noted Li Xin, an analyst at Shanghai-based third-party distributor Howbuy.
“Although such products have been limited to HNWIs, the involvement of institutions is not extensive,” added Li.
Hu Lifeng, a general manager at China Galaxy Securities’ research centre, suggested that the new fund-of-fund products will have a much lower investment threshold.
Under regulations that were revised last month by the China Securities Regulatory Commission, FoF mutual fund products must invest a minimum of 80% of their AUM into other funds.
China Galaxy Securities’ centre, which focuses on mutual funds, has expressed interest in becoming an adviser for new FoF products.
"Some retail investors will seek professionals to help them switch investment funds,” added Hu.
He said the centre was in talks with a couple of fund managers about structuring FoF products, particularly equity funds, investing across different fund houses’ products.
China is a mass retail market, with 80-90% of mutual fund units held by retail investors.
Existing hybrid funds not only invest in other funds, but also hold securities. Very few allocate 80% of their assets into other funds, said Shanghai-based Z-Ben Advisors in a recent report.