Growth in China’s mutual fund industry slowed to a crawl in the third quarter – still better than expected given poor stock market performance – although a potential slump is seen by year-end.
Interestingly, Q3 saw a real shake-up in the rankings of Chinese managers, with Southern FMC replacing E-Fund in the top three by market share. Meanwhile, China Universal and Full Goal fell out of the top 10, to be replaced by ICBC Credit Suisse and Dacheng (see table).
Overall China’s funds industry grew 2% in Q3, from a historic high of 11.6% growth in the previous three months but against a backdrop of a 6.8% decline in the CSI 300 Index over the period.
The falling index dragged down the performance of equity-centric and balanced funds in particular, while the bond market also ran into difficulties in the third quarter, reports Shanghai-based consultancy Z-Ben Advisors.
The question on industry lips is whether AUM can end the year on a high. “With significant redemptions from fixed-income funds and a stock market that shows no signs of immediate recovery, there is a real possibility industry AUM may slump by year-end,” finds Z-Ben.
At the same time, it sees hope in the notable volume of investors that placed bets on index funds towards the end of the third quarter, with a number of non-conventionally designed products still in the pipeline. “The industry appears still to have some fight left yet,” it adds.
By performance, active equity-centric funds suffered most in the third quarter, losing 4.2% in returns on average and leading AUM in the asset class to fall to Rmb700 billion. But inflows into passive equity funds near the end of the quarter point to the perception of a bottoming out.
Bond funds, meanwhile, saw worsening redemptions during the quarter amid market volatility. Earlier in the year short-term fixed income funds had recorded some notable successes in capital-raising, with Z-Ben pointing to novelty in product design as a key driver.
Winners in Q3 fundraising were first-to-market fixed-income funds with unique designs, it notes, although as the quarter progressed they suffered redemptions.
ICBC Credit Suisse raised Rmb40 billion for its Wealth Management 7 Days Bond Fund (helping it to 7th spot among Chinese FMCs), while China Universal drew Rmb16 billion for its 60-day equivalent launched in June.
But the latter lost 75% of its assets during Q3 with a combined loss of Rmb35 billion from its three such funds over the quarter, indicating these products are seen as just a short-term home.
The surprise success story of the third quarter was QDII funds in terms of returns, helped by newly imposed monetary policy efforts in Western markets, notes Z-Ben. Nevertheless, demand for these products remained weak, and fund managers have begun to slow their applications for, and launches of, QDII funds, the consultancy notes.
And good performance did not necessarily translate into net inflow. Despite topping the rankings for best-performing equity-centric and balanced funds, Manulife Teda saw net outflows for Q3. The majority of the firm’s equity-centric funds now have a NAV of less than Rmb1, which as Z-Ben notes is hardly likely to inspire subscriptions in the fourth quarter.
If anything Z-Ben sees a small gain for the CSI 300 Index as the most likely year-end scenario. At the same time it points out that with exposures of equity-centric funds approaching a historic low, the negative impact a weak stock market is having on industry AUM is diminishing.
As a result the consultancy believes that preventing redemptions from potentially high asset-yielding fixed income funds (especially short-term bond funds) must be a priority for managers.
“If fixed income products can hold up their end of the bargain by generating inflows, the industry is likely to end the year with a net AUM growth,” writes Z-Ben.
What it sees as potentially a new trend this year is the introduction of uniquely designed money-market funds (MMFs). China AMC and China Universal both applied in the third quarter to launch such products with different trading patterns that presently marketed funds.
Z-Ben points out that MMFs and non-conventional products are traditionally the two most powerful tools used to inflate end-of-year AUM, so that could be a shape of things to come.
“End-of-year AUM for FMCs poised to launch these funds, and even AUM for the industry as a whole, could hinge on whether or not the CSRC extends its approval of these products before year-end,” concludes Z-Ben.