China’s fund management industry saw AUM fall in the first half of 2011 amid tepid investor sentiment and market volatility, with forecasts for the second half offering few signs of encouragement despite an expected equity-market rebound.
The struggling sector recorded a decline of Rmb100 billion in assets under management to $2.3 trillion ($356 billion) as at the end of June amid poor returns, net outflows from redemptions and limited gains in new products.
This means the industry has barely moved in two years and is leading observers to question whether continued enthusiasm to enter this arena, particularly among brokerages, is justified, notes Shanghai-based consultancy Z-Ben Advisors.
The first six months witnessed a record number of new fund launches – 107, compared with 70 in the same period last year – as fund managers strived to make up for near-constant redemptions. A total of 24 new products were launched in June alone. And Z-Ben sales director Francois Guilloux says this model is showing signs of strain.
“The eye-watering number of new products launched in June appears to be the new normal for the industry,” he notes, “meaning that a record number of new portfolio managers and analysts will be required just for managers to maintain their relative AUM.”
Turnover has become a big problem in what is a vicious circle for the industry: it is raising costs for fund management companies, harming short-term performance and leading to greater difficulty in retaining assets.
Z-Ben says 199 portfolio managers moved jobs in the first half, either to private funds or other fund management firms. But it expects to see some easing of this pressure as private funds look less appealing as a destination (and given that many star fund managers have already made the jump).
Equity funds have been hard hit over the past few months in terms of redemptions. Recent gains in underlying equities have motivated retail investors to sell their investments at par amid expectations of further volatility, finds Guilloux.
Equity funds consistently underperformed their benchmarks over the first half – an average -7.14% decline against -2.69% for the CSI300 – which goes against the grain for actively managed products in an environment of declining equity markets.
“This is normally how these funds establish their performance records,” states Guilloux. “The fact this has shifted has considerable implications for the industry, with index funds now potentially being more attractive.”
He sees as a contributory factor the launch of smaller equity products – around the Rmb1 billion mark – where managers invest in a wide variety of stocks, some not on the benchmark CSI300 index. This compares to the large equity funds where managers have to stick closely to benchmark as there is not enough liquidity to deviate from large-cap and cyclical stocks.
“This freedom, it seems, has come with a cost, particularly as major gains have been seen by cyclical sectors,” says Guilloux.
Fixed income funds and index funds have also suffered redemptions over the past six months, notably among institutional investors as yields offered by bank wealth management products have risen, thanks largely to the relatively strong Shanghai interbank offered rate (Shibor).
In fact, fixed income funds are expected to suffer further amid expectations of additional interest rate hikes in the near future.
However, the majority of domestic sell-side analysts are predicting a rebound for Chinese equities, which would mean gradual gains for the fund industry. “Redemptions will likely continue for the first several months after a rebound starts, and positive performance will need to be in hindsight before the majority of retail investors buy in,” notes Guilloux.
Overall Z-Ben is expecting China’s fund industry to reach Rmb2.6 trillion by the end of this year, driven largely by capital gains. “Funds will continue to launch a large number of new products, though average fundraising results will still remain depressed, with gains made in overall volume, and not necessarily individual quality,” he adds.