Templeton readies MRF fund in tough conditions

In a challenging environment for China products, Franklin Templeton's Shanghai JV will this month offer its first product in Hong Kong. CIO Xu Lirong tips A-shares on a three-year view.
Templeton readies MRF fund in tough conditions

Franklin Templeton will start selling its first China product through the mutual recognition of funds scheme in Hong Kong this month, following disappointing sales in January for the first batch of MRF products.

The China Prospect Mixed Assets fund, which launched in 2007, is managed by the US firm's Shanghai-based joint venture, Franklin Templeton Sealand Fund Management. It is targeting distributors including commercial banks, independent financial advisers, securities firms and third-party fund platforms. The firm has not yet confirmed the launch date or the number of distributors.

Despite returning 37% for 2015 against a benchmark of 18.34%, the fund saw its AUM almost halve last year, dropping to Rmb1.9 billion from Rmb3.4 billion

“Fundraising for southbound [China-into-Hong Kong] funds is highly correlated to the A-share market sentiment, which has been relatively challenging recently,” said David Chang, chief executive for Greater China at Franklin Templeton. 

The CSI300 index has fallen 43% from its peak on June 8 last year, including 18% this year, to close at 3,058 points yesterday, due to uncertainties over China’s currency policies and slow economic growth.

Despite the market crash, Franklin Templeton Sealand more than doubled its mutual fund AUM in 2015, with assets growing 122% to Rmb25.8 billion ($3.9 billion), according to Galaxy Securites.

But total industry MRF fund sales figures for January, released on February 23, were below expectations. Southbound funds raised Rmb21.54 million ($3.3 million) in net inflows in January, while northbound products took in Rmb40.18 million ($6.1 million), according to China’s State Administration of Foreign Exchange. 

Ten southbound MRF funds have been launched so far, with China AMC (HK) and HSBC Global Asset Management the first two firms to sell mainland funds in Hong Kong in late December

The first phase of Franklin Templeton’s fund offering will mainly target retail investors, but the firm will consider targeting institutional investors in the second phase. The firm takes a longer-term view on the MRF scheme, he added.

In fact, many market participants view the product registration for MRF more as a public relations exercise than a business prospect at this stage, as reported

Xu Lirong, chief investment officer at Franklin Templeton Sealand, said foreign investors were hesitant about investing in China due to uncertainty over the renminbi, and were losing confidence in the mainland economy.

The China slowdown is showing no signs of abating. Activity in both the factory and services sectors fell last month to its lowest level in seven years, according to the official manufacturing purchasing managers’ index (PMI) and official services sector PMI.

Worries also appear to be growing among domestic investors. Rising real estate prices indicate large capital flows into property in tier-one cities such as Shanghai and Shenzhen due to concerns over the country’s economic development and currency policies, Xu said.

Average prices in the 100 biggest Chinese cities rose 5.3% year-on-year in February, according to a survey from China Real Estate Index System. This is despite widespread fears that the country’s property sector is due a correction as a result of overcapacity.

The combination of foreign exchange policy changes, the economic downturn and equity market volatility has sparked market panic this year, admitted Xu, but he does not expect continuous renminbi depreciation.

He also argued that economic and corporate earning risks had been exaggerated. A-shares will need time to recover, as investors wait for a more stable renminbi, a more meaningful economic transition and further relaxation of cross-border investment controls, he added.

On a three-year view it is a good time to re-enter Chinese equities, said Xu, but they are are unlikely to generate good performance this year.

Overall, 10 out of 25 authorised mainland funds are now being sold in Hong Kong under the southbound scheme, while three of six Hong Kong funds are being distributed in China.

Three northbound Hong Kong products were approved by the China Securities Regulatory Commission on February 18: JP Morgan’s Asian total-return bond fund, CCB International’s China policy driven equity fund and BOCHK’s all weather China high-yield bond fund. There are 11 awaiting approval.

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