China’s embattled fund management firms have failed to find respite from A-share volatility in the country’s burgeoning debt markets so far this year – in contrast to recent history.

As at the end of September, a total of 155 fixed income mutual funds had recorded an average return of -5.77% to date in 2011, further denting already fragile retail investor confidence.

Fixed-income funds had been regarded as a relatively safe investment in the recent past, having recorded positive returns for six consecutive years from 2005 to 2010 ranging from 5.23% to 19.79%.

However China’s domestic bond market has performed poorly this year as a series of negative events shook investor confidence.

July saw the emergence of a provincial government debt crisis, with fears raised over solvency. The following month, Sinopec issued Rmb30 billion ($4.7 billion) worth of convertible bonds on top of an outstanding CB issue of Rmb23 billion – breaking the unwritten rule of not issuing fresh debt before outstanding bonds have been retired.

And last month saw rating agency China Lianhe sound another alarm for bond investors by downgrading the long-term credit of Shandong Helon by an unprecedented two notches to A-.

The performance has caused dismay to most Chinese FMCs, which had hoped to attract investors with a promise of steady growth, given that the A-share market has largely traded sideways since the second half of 2009.

“The inverse relationship between equity and bond markets is broken this year,” one senior executive at a Beijing-based FMC noted. “The poor performance of the bond markets has been far beyond our expectations.”

According to Shanghai-based data provider Wind Info, just six out of the 155 fixed income funds have recorded positive returns this year, with Tian Hong Structured Bond Fund the best with +2.88% and Bosera convertible bond fund the worst with -14.19%.

FMCs resumed launching CB funds a year ago this month, arguing that such products offered both floor-price protection as well as upside potential. Bosera and Fullgoal started the trend in October and November last year, but have been among the worst performers.

It has left fund management companies nowhere to turn, with money market funds the only type of mutual fund investment to offer a positive return in 2011 (+0.88% in the first three quarters).

The average performance of qualified domestic institutional investor (QDII) funds to date in 2011 is -18.71%. Index funds reported an average return of -14.17%, active equity (-11.55%), hybrid (-6.83), balanced (-9.49%), equity biased (-10.53%) and principal guaranteed (-2.32%).