Equity funds in China go from strength to strength | Fund Managers

Equity funds in China posted an average gain of 12.06% in March, bringing the average gain in the first quarter to 24.40%, according to data provider Lipper. The continued improvement in investor sentiment in China is largely responsible for the gains, which are a complete turnaround from the average loss of 53.14% of equity funds in China in 2008.

"With various positive signals for the economy and the large-scale fiscal stimulus taking effect, the China market continued its momentum and rallied for a third consecutive month in March," says Xav Feng, Taipei-based head of research for China and Taiwan at Lipper.

The Shanghai Composite Shares index surged 13.94% in March and 30.34% in the first quarter, taking the lead among all Asian markets. It was also the best performance for a first quarter since 2000.

Led by equity funds in China, all fund groups posted positive returns for March. China bond funds gained a mere 0.61%, however.

Qualified domestic institutional investor (QDII) funds rose an average of 11% in March, while rising a slight 0.55% on average for the first quarter. Fortis Haitong China Overseas Best Selection Fund, China International Asia Pacific Advantage Fund, and Harvest Oversea China Equity Fund took the lead for March, posting gains of 19.57%, 13.31%, and 12.28%, respectively. Fortis Haitong China Overseas Best Selection Fund was the best performer for the first quarter, with a growth of 6.38%.

The QDII programme allows institutional investors to move funds overseas as part of the liberalisation of China's capital account.

Qualified foreign institutional investor (QFII) funds posted an average gain of 13.60% in March and 27.16% for the first quarter.

With a greater appreciation of the Korean won, Pru AM China Mainland Equity H Class Ci posted a growth of 20.65% and took the lead among all QFII funds. W.I.S.E.-CSI 300 China Tracker and iShares FTSE/Xinhua A50 China Tracker also outperformed, gaining 15.69% and 14.41%, respectively. The passively managed QFII funds outperformed for the month with a return of 15.05% on average, while actively managed funds posted 13.18% on average. Overall, for the first quarter, QFII funds posted an average return of 27.16%, surpassing all domestic fund types.

The total number of approvals stayed unchanged at 79 participants in the QFII scheme. The initial total net assets of all QFII funds rose 12.58% to $7.715 billion in March, signalling that foreign investors are enthusiastic about China investments. Nikko China A Share Fund 2 gained 10.10% and had the largest percentage of net buying among all QFII funds.

China launched the QFII programme in mid-2003 to allow approved foreign institutions to trade A-shares and bonds on the Shanghai and Shenzhen exchanges. The programme was part of the government's efforts to open China's capital market and ease controls on the capital account, under which the yuan isn't fully convertible.

Looking ahead, Xav notes that how the US resolves its financial crisis will still be among the key focuses of investors. The US government is planning to invest more than $1 trillion to bailout financial institutions, instead of taking them over. The Group of 20 (G20) summit leaders also committed $1.1 trillion, mostly through the International Monetary Fund, to combat the worst economic crisis since the Great Depression. They also announced financial rules would be tightened to stop the crisis from happening again.

"It is doubtful that the pledges and commitments made by the G20 will be sufficient to avert unrest in developing nations and emerging markets, but they boosted confidence in the business community, which could shorten the recession," Xav says. "Global markets generally reacted favourably to the summit's outcomes and rebounded."

Xav notes that China has surpassed Japan to become the largest owner of US government bills and bonds. With $2 trillion worth of foreign exchange reserves in hand, China is in the global spotlight and is playing an active and crucial role in the G20 summit and global markets. Even if China didn't announce further increases to its Rmb4 trillion ($586 billion) stimulus package at the 11th National People's Congress (NPC) session, the Chinese economy will be supported by the rapid expansion in government infrastructure spending and policies to revive housing investment, he says.

"The growth momentum of the Chinese economy remains strong because China has the advantages of a vast and cheap labour force and a vast consumer market," Xav says.

He notes that China's purchasing managers' index (PMI) rose to 52.4 in March from 49.0 in February, marking the first time the index has been above the threshold of 50 since last September. The continuing rally of the PMI signals that China's economy may have bottomed out and started to warm up because China's economic stimulus measures have taken effect.

Average performance of fund groups in China in March:

Bond CNY +0.61%
Money Market CNY +0.14%
Guaranteed +1.18%
Mixed Asset Other Conservative +4.43%
Target Maturity +9.86%
Mixed Asset CNY Balanced +9.14%
Mixed Asset CNY Flexible +10.31%
Mixed Asset CNY Aggressive +11.48%
Equity China +12.06%

Top performing QFII funds in March:

Pru AM China Mainland Equity H Class Ci +20.65%
W.I.S.E. - CSI 300 China Tracker +15.69%
iShares FTSE/Xinhua A50 China Tracker +14.41%
APS China A Share +13.33%
Hang Seng China A-Share Focus A1 +13.28%
JF China Pioneer A-Share +12.81%
Morgan Stanley China A Share Fund 11.56%
Nikko AM China A Stock Fund 10.53 +1.24%
Nikko China A Share Fund 2 +10.10%