China Merchants Fund Management -- a joint venture between China Merchants Bank, China Merchants Securities and ING Investment Management -- has secured approval for a qualified domestic institutional investor (QDII) product.
The China Securities Regulatory Commission (CSRC) has approved the Shenzhen-based firm's product plan to launch a global commodities fund, with ING IM as the investment advisor. The Dutch firm will be responsible for supplying investment research and strategic and tactical asset-allocation advice to the fund. The product will invest in energy- and materials-related stocks listed in Australia, Europe and North America. It will be 25% benchmarked to the MSCI World Energy index and 75% to the MSCI Raw Materials index.
"Currently we have no resources fund or strategy into which this fund will invest," says Edmund Lacis, regional head of wholesale and business development at ING IM in Hong Kong. "We will be leveraging our existing global knowledge and expertise to develop a new strategy for this fund."
Grant Zhang, portfolio manager at China Merchants, tells AsianInvestor he will act as the fund's manager. He started as a securities analyst at China Merchants Securities. Depending on fund-raising results, Zhang could manage up to $500 million worth of assets -- the size of the forex quota freshly prescribed to China Merchants by the State Administration of Foreign Exchange (Safe).
The QDII approval comes on the heels of a recent QDII fund launch by Guangzhou-based E-fund, which began fundraising for a self-managed Asian equity strategy on December 7. E-fund has yet to announce how much money it has attracted. Up next, Penghua has an $800 million quota for a manager-of-managers strategy with shareholder Eurizon Capital, while Changsheng has a $700 million quota for a pending Goldman Sachs-advised product.
Sources say Guotai also secured a $700 million quota for a tracker fund based on the Nasdaq 100 yesterday.
Safe only resumed quota handouts in October, after a 17-month hiatus.
The CSRC's approval of China Merchants' product plan has raised concerns among some industry observers. The green light has been given despite the uncertainty over ING IM's future ownership due to the European Commission-mandated break-up of its parent. In October, ING was told to offload its investment and insurance businesses by 2013. Institutional investment consultants Watson Wyatt and Mercer have since withheld their 'buy' recommendations for the group for that reason.
Even before the ruling, ING had been seeking buyers for its businesses in Asia and the US, to raise funds to repay the bailout capital it has received from the Dutch state. In Asia, it has already sold off its Taiwanese insurance, Australian wealth management and Asia-wide private banking businesses.
In a Financial Times interview on December 21, new global chief investment officer Jan Straatman outlined a plan to break up ING's 300-strong investment team in Europe into 14 different boutiques. These units will be organised by the asset classes they invest in. Straatman is quoted as saying that the same structure will be applied in the Asia-Pacific region and the Americas, despite admitting that he has not consulted local staff on the decision.
The plan appears to contradict previous goals set when ING Group split the investment management and real estate investment business from the main balance sheet and combined them to improve synergies by centralising back-office functions and combining sales roles. The firm is facing increasing difficulties in retaining talent.
These variables are viewed as a risk to the management of China Merchants' fledgling QDII fund and to its future investors.
That said, an overseas resources fund will be a novelty to investors on the QDII scene. China Merchants has a positive house view on the long-term global demand for materials and energy.
China Merchants' move will mark a potential point of differentiation in the sector. Its global resources theme will be a first. Of the 10 existing QDII mutual funds in the market, the main asset types have been global equities, Hong Kong H-shares, red chips and Chinese concept stocks in Asian equities.
Moreover, the launch will be backed by the distribution prowess of China Merchants, China's third largest brokerage. China Merchants Bank and China Merchants Securities are among the most successful private wealth management providers in penetrating the growing Chinese middle class. The bank went public in an IPO in 2006, followed by the securities arm last November.
Shanghai-based consultancy Z-Ben Advisors believes the group's IPO last year has distracted it from the business of fund management. Based on assets under management, China Merchants' ranking slipped 11 places from 18th in 2008 to 29th last year, with Rmb35.6 billion ($5.2 billion) in AUM as of December 31. This can be partially explained by the string of portfolio managers it lost last year, including Hao Jianguo and Huang Shunxiang.
According to data from investment consultant Morningstar, of China Merchants' 11-strong team of portfolio managers, eight have been with the firm for less than three years, and four of those have less than one year of service. CIO Zhang Bing has been managing portfolios at the firm for about four years.
The most experienced person at China Merchants Fund, Yang Yi, does not manage funds. He has been there since 2003, but his expertise is only available to institutional investors or high-net-worth clients who have signed up to China Merchants' segregated accounts.
Z-Ben Advisors analyst Zhang Haochuan expects demand for the new fund to be weak. China Merchants has freshly finished a round of sales totalling Rmb2.6 billion for its small- to medium-cap fund, so customers' appetite for further China Merchants products may be subdued.
In addition, notes Zhang, Chinese investors don't need to go offshore for commodity investments. "Unless there are additional derivatives involved, investors will probably get higher exposure by investing in local commodities companies," he says. "They don't hedge [their books] as much."