A harsh investing environment saw fixed-income products and qualified domestic institutional investor (QDII) funds comfortably outperform index and equity funds on average in China last year.

The CSI 300 registered a 12.5% drop in 2010, leading index products to register an average 11.73% decline over the same period, while their equity counterparts garnered just 0.31%.

Bond funds, on the other hand, finished the year with an average 7.02% return, while QDII funds – despite lagging fundraising levels – managed to realise a mean 5% return.

Smaller firms, which are more nimble by nature, in general found themselves better positioned to generate returns, particularly on their equity portfolios, notes consultancy Z-Ben Advisors (the top 10 equity and bond funds for 2010 are listed below).

Z-Ben compares Huashang, which stood on top of the 2010 rankings with a 21.8% AUM-weighted average return, to industry heavyweight China AMC, which registered a 1% AUM-weighted return. Huashang’s first product – the Dynamic Alpha Balanced Fund – was only launched in 2007.

“The fact that a once lower-tier firm could grow to become a sizeable contender in several short years is a testament to the industry’s vitality,” suggests Francois Guilloux, director of regional sales for Z-Ben based in Shanghai.

China AMC did boast several top-performing funds last year, including China AMC Enhanced Strategic Fund and China AMC Large Cap Enhanced Fund, although given the company’s size, these were not enough to pull up the firm-wide average. Huashang, on the other hand, saw top-line performance nearly across the board.

But Z-Ben notes that meagre equity gains were not suffered equally among the industry, with small firms Soochow and Morgan Stanley Huaxin second and third on the weighted performance ranking.

“Those [equity] managers that found returns were able to do so through timing, while also having higher levels of exposure to small and mid-cap stocks, which registered much stronger gains than their large-cap counterparts,” notes Guilloux.

 

Noticeably, three-year performance rankings still find products from heavyweights China AMC and E-Fund on top. But Z-Ben notes that many competitors were only beginning operations in 2007 and as such have gained in experience and are now better placed to compete.

But changes to the prevailing trend in which large firms continue to grow at the expense of smaller counterparts will not happen overnight, warns Guilloux, with small firms still facing hurdles in terms of promoting their products to end-investors and finding reliable distribution channels.

Nevertheless, Z-Ben expects smaller firms to remain well-placed to generate returns in 2011, noting that as equity markets develop, bigger firms will be under increasing pressure to allocate a large amount of incoming funds.

“QDII products will also continue to see a divergence in terms of performance vis-à-vis their domestic counterparts, though whether this will translate into stronger fundraising results remains to be seen,” adds Guilloux.

“We remain confident, however, that growth prospects are there for fund managers, given that several handily bested the market in 2010. Should equity sentiment turn in the first half of the year, strong gains will surely follow.”