A late rally in China’s A-share market helped drive mutual fund industry AUM to expand 30% to Rmb2.8 trillion ($450 billion) this year, with similar growth forecast for 2013 to a new high.

Chinese houses launched 260 funds and raised a record-breaking Rmb644.7 billion across 2012, notes Shanghai-based consultancy Z-Ben Advisers.

But it points out that the lion’s share of AUM growth occurred in the fourth quarter as fund firms scrambled to attract fresh flows into their money-market funds (MMFs) to protect year-end market share rankings.

While managers did launch 74 new products over the year, accounting for Rmb211.7 billion in fundraising and supporting AUM growth, MMFs continued to be the weapon of choice. They accounted for 20% of industry AUM by the end of 2012, up from 14% a year earlier, with the MMF segment growing 94% year-on-year (primarily in Q4).

The late equity-market surge also padded out the figures and the returns of equity-centric funds: the CSI300 Index was up 7.55% for the year and 10% during the final quarter. “Truth be told, had it not been for a rebounding stock market, year-end AUM results would not have been very pretty,” notes Z-Ben.

However, the consultancy is expecting recent AUM growth to continue and forecasts industry assets to swell to Rmb3.68 trillion by end-2013, a 28.5% rise to a new high. Its previous record was Rmb3.2 trillion back in mid-2007.

But as Z-Ben notes, the billion-RMB question is which segment will drive this growth.

The consensus last year was to relegate equity-centric funds to the bench, with market volatility driving retail investors into fixed income, MMFs and bank deposits.

Similarly QDII funds struggled to catch investor eyes, growing 10% in market-share terms but ending 2012 at just 2% of industry AUM “despite outperforming every other product category in the mutual fund industry”, notes Z-Ben, describing it as “bizarre investor behaviour”.

The consultancy warns of the potential pitfalls of fund firms having retreated into MMF and fixed income baskets to solidify their market positions.

Strong performance in the A-share market this year would see assets flow into higher-yielding products and leave managers who are heavily invested in low-risk products “gasping for air”, as happened in late 2005 and early 2006, Z-Ben notes.

It singles out Invesco Greatwall and China International for equity fund performance in 2012, and mentions smaller houses New China and Lombarda China. It argues that they will be well positioned to grab AUM and market share if stock prices continue to move higher.

“For those heavily dependent on MMF and fixed income for AUM, any material market rally, using history as a guide, would have devastating effects,” Z-Ben concludes.