China’s Love for New Mutual Funds Cools After Tough Year

(Bloomberg) -- A tumultuous year for Chinese markets looks to be finally weighing on demand for new stock funds.

While equity funds have raised 2 trillion yuan ($314 billion) this year -- matching 2020’s record -- fundraising this quarter is poised to be the slowest in two years, according to data from consultancy Z-Ben Advisors Ltd. Launches have slowed through the year as economic recovery loses steam and China’s crackdown on private enterprise dampens sentiment.

It’s no surprise that interest is waning. Mom-and-pop investors who rushed to buy products as the market climaxed in February have been on a choppy ride. Stock funds tracked by China Securities Index Co. returned a weighted average of 5.7% this year, but are down 6% from this year’s high when inflows were largest. 

While the year-to date figure is still an outperformance by around 11 percentage points against the benchmark CSI 300 Index, it is a letdown compared to market-trouncing annual returns of over 40% in the past two years.

Trust Chunchun

Wendy Wang, a 29-year-old working in the education sector in Shanghai, is among those who have been through a test of patience after purchasing a flagship product managed by Invesco Great Wall Fund Management Co.’s Liu Yanchun in late 2020. 

“It’s been a lot more difficult to make money this year,” she said. “I’m still 7% in the red, but I still trust Chunchun and plan to buy further dips,” referring to a pet name for the portfolio manager.

Liu’s fund is down 8.5% this year in total return terms after suffering a drawdown as deep as 32%, a performance that is difficult to stomach for investors used to stellar results over the last two years.

He is joined by a crowd of high-profile portfolio managers providing less than impressive returns. The E Fund Competitive Dominant Enterprises Mixed Fund, which drew a record 237 billion yuan in orders, is down nearly 6% since its January inception, while the 31 billion yuan ZhongOu Medical and Health Mixed Fund is down 4.3%. 

Chinese savers have fewer avenues to invest than peers abroad thanks to the nation’s capital controls. Households hold just 2% of their assets in stocks and equity funds, compared to 7% to 9% in the U.S., Japan and Europe, according to a central bank report in 2019.

Still, fundraising in 2022 will likely slow further as muted returns put off investment decisions, said Samuel Gong, analyst at Z-Ben Advisors in Shanghai. 

“After a disappointing year for most, especially severe blows for those who joined the rally late, the excitement for mutual funds will revert to the mean,” he said. 

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