Consultancy Z-Ben Advisors has forecast the recent mutual recognition of funds (MRF) initiative will drive further liquidations of qualified domestic institutional investor (QDII) product, to the point that it renders the domestic scheme redundant.

There are currently 14 funds in the northbound pipeline under the MRF scheme, with fund promoters expecting authorisation by the end of this year.

But Z-Ben analyst Neil Flynn has boldly predicted that this new wave of funds will likely replace the existing QDII funds on offer to domestic Chinese investors wanting overseas exposure.

Shanghai-based Z-Ben reasons that the recent closure of two funds by Chinese joint-venture asset managers – Fortune SG Mature Market Enhanced Equity and Manulife Teda New Global System Equity – is the start of a trend.

While they are the first such closures, Flynn argues they will not be the last. “Some QDII funds have been an Achilles heel for their domestic managers for years,” he noted.

The QDII scheme was rolled out in 2006, but the growth of QDII funds has been hampered by Chinese investors’ preference for domestic exposure, given the strong performance of the A-share market despite the recent market turmoil.  

“The rationale for closure of QDII funds is simple,” said Flynn. “Demand is weak and it’s an unprofitable business, so fund management companies haven’t been willing to actively market these products. If you have a fund that has not been performing particularly well, you want to eliminate it and allocate your resources more productively.”

Based on Z-Ben’s calculations, there are 27 QDII funds, of the 70 in existence, that could potentially be closed. "They [the 27 funds] all have assets under management of less than Rmb65 million ($10 million) and 20 have AUM less than Rmb50 million.”

A fund with less than $10 million in AUM is generally considered to be not viable.

For the 14 funds seeking authorisation in the first wave of northbound MRF, Flynn said: “The requirements for lodging are much stricter, which suggests the quality of these funds will be higher than the QDII funds. For example, JP Morgan’s fund submissions are based on existing funds that are tried and tested.”
 
The challenge for the first wave authorised under MRF will be for promoters to decide whether to get their products out into the market before the end of the year, or keep their powder dry until after Chinese New Year, which falls on February 8 in 2016.

"In October/November, in the final period of the year for meaningful utilisation of bank distribution platforms, if you have an interesting product you can grab some good AUM in that period," noted Flynn.