Organic asset growth, new product inflows and returns were all up for mainland China fund managers in July, registering Rmb19.14 billion, Rmb7.79 billion and Rmb171.14 billion, respectively. This is a positive signal that confidence may be returning, estimates Shanghai-based consultancy Z-Ben Advisors.

However, industry AUM was down 13% for the second quarter of 2010 from the first quarter, at Rmb2.116 trillion, with the Rmb1.142 trillion of domestic manager assets falling by 17.1% and the Rmb973.4 billion of joint-venture manager AUM down by 7.6%.

Caution still reigns among Chinese fund managers, says Z-Ben, which meant they largely missed out on strong stock-market returns last month. The CSI 300 ended July up 12%, but for most firms, equity exposure was relatively low at the start of the month, and there is still only “a minority” of portfolio managers ratcheting up equity exposures.

And this minority is typically boosting those exposures from already high levels, says Z-Ben – “these PMs are very decidedly not from the capital protection end of the fund theory spectrum”. Such firms will have already recorded losses earlier in the year that have hindered their ability to attract inflows from new products.

Meanwhile, the majority “are testing both their historic highs for cash exposure and, in some cases, the upper limits of cash allowed by their prospectuses”, adds Z-Ben.

This caution seems to be reflected by the amount of fixed-income products on offer. The net inflows both to bond funds and to money-market funds -- at Rmb2.15 billion and Rmb2.96 billion, respectively – exceeded the Rmb2.13 billion that went into equity funds in July. This contrasts to 2009, when fixed income was “almost entirely absent” from new product offerings, says Z-Ben.

Moreover, the 15% allocation to cash for the average equity mutual fund in China – more than Rmb210 billion – is unlikely to move slowly back into equities. “If cash reserves were to be released the event would arrive in a frenzied rush as panicked fund managers suddenly realise – like birds flocking in a new direction – that the rally they’re missing is a real one and it’s past time to pile in,” says Z-Ben.

The consultancy has the following advice for mainland portfolio managers: “If you can’t bring yourself to be a leader in transitioning portfolio states from defensive to offensive, at least stop being one of the lagging majority, who won’t move until the life’s been all but fully squeezed out of the market.”

As for their “long-suffering” clients, Z-Ben says now is a good time to reiterate the value of having a genuinely varied equity fund range, with at least one fund that is permanently aggressively managed.