Chinese FMCs left red-faced by industry stats

May 18, 2011

Regulatory relaxation has prompted a flood of new funds, but industry AUM is shrinking. Fund supply is growing faster than demand, and net redemptions are increasing.

Chinese fund management companies (FMCs) find themselves in an embarrassing position: new products launches are gathering pace, yet industry AUM keeps shrinking.

Overall assets under management declined 4.3% to Rmb2.39 trillion ($367 billion) in the first quarter of 2011. Yet this year to early May, 63 newly incepted funds have raised a total of Rmb111 billion, with a further 29 funds under IPO as at May 18.

The China Securities Regulatory Commission (CSRC) has relaxed the new fund approval process, enabling FMCs to apply for up to six new fund products at the same time. As a result, new product launches have climbed above historical averages.

However, the increasing number of new products has caused congestion in distribution channels and triggered trailer fees to rise. “As distributing banks now find themselves in a privileged position, they are increasingly seeking more compensation for their services,” states Shanghai-based consultancy Z-Ben Advisors.

The firm also notes that many bank-backed joint-ventures do not appear to be receiving the same level of support they once did from their banking partners.

Li Yan, deputy general manager of Shanghai Securities Company’s fund rating and research centre, points out: “The supply of mutual funds is growing at a much faster pace than demand from retail customers at banks. As a result, the initial fundraising size of new funds has been shrinking this year.”

Moreover, the homogenous nature of new funds is also intensifying competition among FMCs. For instance, among the 29 funds under IPO, there are three principal guaranteed funds (China Southern, Changsheng and Galaxy); three structured debt funds (Wanjia, Lombarda China and Fullgoal) and two convertible bond funds (China Universal and Huaan).

Meanwhile, net redemptions from existing funds are also increasing, partially due to volatile market conditions this year. According to data from TX Investment, the universe of 759 open-ended funds suffered average net redemptions of 4.69% in the first quarter.

Money market funds had the highest level of net redemptions at 17.15%, followed by fixed-income funds at 9.68%, balanced funds at 3.56% and equity funds at 3.2%.

Even though qualified domestic institutional investor (QDII) funds recorded good performance in the first quarter, thanks to the recovery in overseas markets, some six billion shares were redeemed from QDII funds in the first quarter.