China's investors are learning the hard way that size does matter...but not the way they might think. Beijing-based Harvest Fund Management launched the nation's biggest-ever fund near the peak of China's A-share frenzy in early December. This was a record-smashing blockbuster by any metric, not just for China but worldwide. Not only was it big, raising RMB40 billion ($5.1 billion), but doing so within hours in a single day.

Mainland sources suggest, however, the Harvest Strategic Growth fund lost more than half of its assets under management from a peak of RMB42 billion over the first quarter of 2007.

The company has still made plenty of money off this fund. It is typical in China for newly listed funds to see redemptions of 30-40% over the course of six to nine months. Fund-management companies try to raise as much as possible to capture the annual management fee, while distributors also enjoy revenues from front-end loads. Fees on equity funds in China are typically 1.5-2%.

But customers of Harvest invested in this fund do not seem to have fared so well. The sheer scale of money to be invested in China's underdeveloped capital markets was always going to be a challenge to place. Sources report much of the fund never made it out of cash, let alone found its way into favoured securities.

While the Shanghai & Shenzhen 300 Index has returned more than 30% year to 23 March, the Harvest fund gained a mere 3.86% according to Lipper data (at 28 February). It is expected to return less than 5% for Q1 2007. If you consider that punters have already paid front-end loads and a management fee, they may have only broken even.

Executives at Harvest did not return calls by press time. Nor did execs at Deutsche Asset Management, which owns a 19.5% stake in Harvest.

According to Liang Zhou, LipperÆs China research manager in Shanghai, this year is likely to see an up-tick in redemptions across the board. ôI have not heard the latest figures for the Harvest fund,ö he says. ôBut we know that redemptions have been high. It has been predicted that mutual funds will raise RMB100 billion this year, but that does not taken into account the outflow of money from funds. The absolute increase in total AUM has not been that great.ö Funds are required to publish this data every three months.

Mass redemptions usually involve taking profits from funds that have had good performance. Bad performers, ironically, can sometimes retain assets as people wait for a turnaround before escaping.

HarvestÆs low performance, however, seems to have convinced many investors to leave now before they start to actually lose money.

Peter Alexander, principal at Shanghai-based consultancy Z-Ben Advisors, reckons the fund has never had more than 50% in equities. ôFrom the start the biggest issue was trying to get the cash to work,ö he says. ôLegally funds cannot have more than 20% in cash and during the first three months of the year it would probably have made up near to half the portfolio.ö

ChinaÆs regulators have been taking great pains to cool down the countryÆs seemingly insatiable appetite for mutual funds in recent months, including imposing quotas on new launches as reported by in early January. It appears investors may be doing the job for them.