Funds of funds (FoF) are set to be one of the key battlegrounds for for Chinese mutual fund managers this year, with the first product launches imminent. But some in the industry, including potential distributors, have raised doubts about the extent to which FoFs will gain traction.

With the first batch of products expected to hit the market in June, there are questions over whether domestic asset managers can construct truly sound portfolios, given the challenges they face. 

Issues cited include the relatively constrained universe that these FoFs can invest in, the volatile environment, investors’ short-term outlook, and managers’ tendency to allocate to in-house funds.

These products represent a move by mainland fund houses into a relatively recent, but fast-growing concept in recent years; that of multi-asset or asset allocation strategies, incorporating dynamic allocations of bonds and equities. In the past Chinese mutual funds have generally focused on a single asset class.

After the China Securities Regulatory Commission (CSRC) gave FoFs the green light in September, 15 fund houses on November 29 submitted the first batch of 22 products for approval. As of April 1, 31 fund houses had submitted 62 FoFs (see table below). CSRC said the approval process will take six months, so the first approved could come as early as next month.

FUNDS OF FUNDS SUBMITTED FOR APPROVAL IN CHINA

Fund houses  Number of funds of funds submitted 
ChinaAMC, China Merchants 4
Bosera, CCB Principal, Changsheng, China Southern, China Universal, Fullgoal, GF Fund, Guotai, Nuode 3
CIFM, Chang Xin, E Fund, First Seafront, Harvest, Penghua, ZhongRong 2
Axa SPDB, Chang'an, HFT, HuaAn, Jyah AM, Manulife Teda, New China Fund, Tebon, Tianhong, Rongtong, Wanjia Asset, Yinhua, Zhong Ou 1
  Total: 62 (by 31 firms)

Source: CSRC

In line with the big number of applications, fund houses AsianInvestor talked to since the start of this year all picked FoF as one of the most important areas they will allocating resources to develop in 2017.

“We expect multi-asset portfolios to be the hot topic for this year,” said Jelle Vervoorn, chief executive of HFT Investment Management (Hong Kong).

And Chris Tse, Hong Kong head of intermediary distribution at BNY Mellon Investment Management, said he was receiving a particularly high volume of enquiries about multi-asset products from Chinese fund managers. 

This reflects the situation elsewhere in Asia, with salaries soaring for asset allocation experts in Hong Kong and Singapore, according to recruiters.

Issues in question

Fund houses expect to see strong interest from wealth managers in FoFs, but one Shanghai-based bank is cautious about FoF strategies, said an analyst in the firm's wealth management department. He told AsianInvestor that mutual fund houses tended to construct FoF portfolios by allocating to in-house funds rather than seeking out the best and most suitable products across the market.

Others in the industry, including asset managers, have also said they were cautious about investing in FoFs, particularly in China's current market environment.

Zhu Kun, investment manager in the asset allocation department at GF Fund Management, pointed to three key obstacles that she felt may prevent FoF mutual fund products from taking off:

  • the relatively paucity of fund types available in China combined with the restrictions on overseas investments;
  • the challenge of picking core assets that are stable given the volatility in the local equity market; and
  • the clash between the long-term horizon required for asset allocation strategies and mainland investors' tendency to focus on short-term gains.

Asset managers cannot design a product that has distinctive characteristics because of the constraints on what mutual fund FoFs can invest in, agreed Wang Feng, product director at Shenzhen-based China Merchants Fund Management.

A further issue is that there are no appropriate derivatives for hedging, he added, so it is very important to take the liquidity of the underlying funds into consideration. 

Feng and Zhu were speaking in Beijing at the Jinlin 2016 Quantitative Investment and Hedge Fund Conference in late March.

Developing expertise

Since mid-2016 some of the biggest Chinese fund houses have been setting up teams to develop FoFs, including Bosera, China International Fund Management, China Southern, E Fund, Harvest, Yinhua, Tianhong and Penghua.

Many fund houses told AsianInvestor that they were confident of their FoF capability because they had constructed such strategies for institutional clients' segregated accounts.