China set for record fund launches in Q4: Z-Ben

Consultancy Z-Ben Advisors is forecasting that the fourth quarter will set a record mark for new fund launches in China and that industry AUM will rise 25% to hit Rmb3 trillion by the end of this year.

China’s fund industry saw assets under management increase 14% sequentially in the third quarter to reach Rmb2.4 trillion ($358.2 billion). The firms that benefited most from this gain were those with solid allocation decisions and sector exposure, Z-Ben notes.

Equity and balanced funds were able to beat a 14% gain in the cap-weighted CSI 300 in the third quarter, although ironically this led to increased outflows for them, checking gains from capital appreciation.

“The most important industry-wide trend in the third quarter was a gain in total AUM with a simultaneous decrease in shares outstanding; the result of improved performance leading investors to reduce their exposure as many fund products recovered from previous losses,” notes Francois Guilloux, director of regional sales for Z-Ben Advisors.

“While it may seem that firms which demonstrated strong returns were punished, it was also clear that a handful of firms with outstanding returns were able to eke out organic inflows; a signal that, going forward, new product launches in isolation will be a less reliable means to grow market share.”

The third quarter saw 33 new fund products launched (still down on the second quarter record), with bond funds in particular demonstrating strong fundraising results as market sentiment remained mixed.

Guilloux is predicting that the fourth quarter will see a record number of launches as fund managers start to take advantage of their ability to launch more than one product simultaneously.

In particular Z-Ben expects new equity funds to register strong interest, buoyed by an 11% gain in the CSI 300 in October. Huashang’s new equity product, for example, reportedly brought in Rmb3 billion in just six days.

Nearly every firm increased equity exposure in the third quarter (with the industry moving up to 81% of total exposure, from 71% at the end of the second quarter). However, with the fourth quarter likely to be volatile, Z-Ben suggests the winners will continue to be firms that can make the right picks, rather than those that have made large bets on equities in general.

While the consultancy also expects a pick-up in index funds, it notes this may peak in the fourth quarter as firms back away from putting in new applications for passive products.

QDII also saw numerous new funds in the third quarter, a handful enjoying a warm reception from investors. “We expect this to continue into the fourth quarter, though many firms will be forced to bring a QDII product to market to round out their product portfolios,” says Guilloux.

“Given concerns regarding currency appreciation, and sentiment that mainland markets may once again outperform their more mature counterparts, fund managers may resort to offering emerging market focused products. We also expect to see a rise in fund of funds products within the QDII segment.”

Z-Ben also highlights the strong returns that Soochow registered on its equity portfolio in the third quarter (an average of 22.33% across all products). Even without a new product launch, Soochow was able to grow its AUM, gaining an additional 10 basis points of market share.

“This is further evidence that it is still possible to grow AUM incrementally through subscriptions to existing products,” adds Guilloux. “That being said, major market share shifts will still come from well-timed product launches, though without performance, painful redemptions are certain to follow.”

The consultancy suggests one reason for decay in market share in the third quarter was the limited asset retention efforts carried out by firms. In this regard China AMC stood out as it was able to use dividends to motivate organic inflows.

Overall  Z-Ben estimates that industry AUM will hit Rmb3 trillion by the end of the year as firms capitalise not only on strong market growth but also accelerating new product offerings and organic inflows.

“We do, however, factor in fund managers’ tendency to inflate year-end numbers with money market fund inflows, which are likely to come pouring out immediately after the new year,” adds Guilloux.