Consultancy Z-Ben Advisors expects new QDII product launches to continue expanding in China over the next year, adding that a valuable opportunity is about to present itself to foreign firms with a domestic partner.
Yesterday, Shanghai-based fund manager Fullgoal revealed that its inaugural qualified domestic institutional investor (QDII) fund had attracted Rmb828 million ($124 million) in assets – above this year’s QDII fundraising average of Rmb550 million.
QDII funds delivered a strong performance in September, returning 7.72% on average versus 2.35% for the average domestic equity fund. Two QDII funds even returned in excess of 10% last month – figures that could spur fresh demand among local investors.
Z-Ben has counted as many as 12 new QDII funds in the product development process and is predicting that at least 60 QDII mutual funds will be available on the market by the end of 2011.
“As the universe of domestic, onshore products becomes increasingly crowded, QDII funds remain the last uncontested territory,” says Francois Guilloux, director of regional sales at Z-Ben Advisors. “This, in turn, means there should be an increasing number of new QDII funds coming to market over the next year.”
Guilloux notes that such a trend is already underway as a number of mid-tier fund managers prepare to launch their respective products. These include the Huatai-Pinebridge Leading Asian Enterprise Fund, while others, such as Citic Prudential, are in the process of applying for product approval.
Adding to the momentum are firms that are preparing a second QDII product launch, including E-Fund and China International.
However, Z-Ben suggests it’s premature to conclude that demand for offshore products among domestic Chinese investors is re-emerging in any meaningful way.
Attempting to provide a counterbalance argument for above-average inflow into Fullgoal’s fund, Guilloux notes that the firm is already known as a strong manager of fixed-income funds, and demand for bond funds domestically has stayed strong, averaging Rmb3.1 billion per new product in September.
He also questions whether QDII funds will continue their outperformance this month, given that the CSI 300 has risen by 11.2% so far in October.
“Even if QDII funds were to continue to outperform domestic asset classes, Chinese investors are still likely to balance these gains against concerns of the negative effects from an appreciating renminbi,” Guilloux adds.
He notes that, while new QDII funds are expected to rise over the next 12 months, fund managers will need to keep one eye differentiation and the other on keeping costs under control.
But he suggests that this balancing act could provide a new set of opportunities to foreign asset managers, especially if local firms were to shift more aggressively towards the fund-of-fund product structure.
“For those firms which have developed a relationship with any Chinese fund manager over the past two years, Z-Ben Advisors would strongly advise reconnecting with your contacts,” says Guilloux.
“Your counterpart’s need to develop unique offshore products, while simultaneously balancing costs and returns, means that a valuable opportunity is about to present itself.”