China’s beleaguered fund management companies are reporting rising interest in short-term wealth management fixed-income products in contrast to poor sales of mutual funds.
Just this month two such launches raised over Rmb40 billion in a week, from May 2 to 7, and more are in the pipeline to cater to investor demand for products with low risk and stable returns.
The two were both 30-day WM bond funds, one from China Universal (which to date has raised Rmb244 billion) and one from Hua’an (Rmb182 billion). Also, from May 14 to 21, Hua’an saw its quarterly WM bond fund receive Rmb55 billion in subscriptions.
Such fundraising breakthroughs stand in stark contrast to China Universal’s equity fund, for example, which raised a measly Rmb8.4 during a month-long IPO process to March 7.
This is evidently a sign of things to come, with three more short-term WM bond funds due to be made available to investors next month: a bimonthly product by Hua’an, a quarterly open-ended fund from Everbright Pramerica, and a 60-day product from China Universal.
Further, China Universal and Everbright Pramerica are also awaiting regulatory approval for similar funds.
But these products are not innovative. They are a copy of WMPs sold by banks, primarily investing in negotiable term deposits with higher interest rates. That's despite the fact their investment scope includes bond-repos, government bonds, central bank bills, mid-term bills and corporate bonds.
Hua’an Monthly WM Bond Fund, for instance, is 99.93% invested in bank term deposits for the initial operating period (May 9 to June 27.) The fund is open for subscription and redemption until the second last working day of the period (June 26).
The one-year term deposit rate in China stands at 3.5% at present, while the reference rate of annualised return for the Hua’an Monthly WM Bond Fund is in the range of 3-4% (retail class) and 3.24-4.24% (institutional class).
As domestic equity and bond markets both performed poorly last year, WMPs sold by banks gained in popularity among investors. By the end of 2011 Chinese banks had issued a total of Rmb16.5 trillion in such products.
But late last year the China Banking Regulatory Commission banned banks from issuing WMPs with a duration shorter than 30 days, over liquidity concerns that banks were using them to hit deposit-loan ratio targets, particularly at the end of each quarter.
With an explosion in the number of mutual funds over the last two years (from 550 in 2009 to over 900 in 2011), getting mutual funds onto the shelves of banks has become increasingly difficult. Market uncertainty has meant it has been harder to sell traditional funds, although investor demand for short-term WMPs is still there.
As a consequence, fund managers have sought to fill the void left by banks by offering these short-term WM bond funds. However, if their performance fails to beat bond funds or money-market-funds, these products may also soon fall out of favour with investors.