China’s $1 Trillion Stock Rout Pinned on Panicky Fund Investors
A screen displays gold price in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

China’s $1 Trillion Stock Rout Pinned on Panicky Fund Investors

As China’s stock market stabilizes after a $1.3 trillion rout, it’s becoming clear that the mutual fund industry is being put at the center of the turbulence.

State media singled out the sector on Thursday, with the Securities Times calling in a front-page commentary for new investors to stay rational and fund managers to better balance growth in assets with long-term performance. Major insurers, on the other hand, didn’t make large-scale redemptions during the selloff, according to another report.

Mutual funds gained popularity after their returns beat the market for a second year running and regulators encouraged the development of institutional products to cultivate a culture of long-term investing. More than $240 billion in stock-focused products was sold last year, a record for the industry. The pace accelerated in 2021, with equity funds launched in January and February raising $83 billion, according to Z-Ben Advisors Ltd.

The $3 trillion industry proved to have little immunity to the prevailing get-rich quick mentality, with funds piling into the same handful of stocks and driving their valuations sky-high. While that strategy juiced returns on the way up -- the CSI 300 Index surged almost 20% in two months to near a record -- it also meant a faster pace of declines on the way down.

China’s $1 Trillion Stock Rout Pinned on Panicky Fund Investors

Such a narrow focus isn’t unique to China. In the U.S., equity-market concentration got so extreme in recent years that the five tech and internet stocks driving the rally became a group in their own right -- the Faangs. The dangers of sticking with a handful of past winners can be seen in Cathie Wood’s Ark Investment Management, whose main exchange-traded fund has lost 23% since a Feb. 12 high after more than doubling last year.

But in China, it’s as if most funds followed a single strategy: buy big-cap liquor stocks. As shares of firms such as Kweichow Moutai Co. surged, investor returns multiplied, creating cult-like followings of some fund managers. That was good business: an equity fund launched by E Fund Management Co. in January drew 237 billion yuan ($37 billion) in orders -- the most on record for a stock product in China, according to the Securities Times.

When the market began to reverse, investors turned on their former heroes. Zhang Kun had been hailed on social media as “Prince Charming” and “Brother Kun” after his E Fund Blue Chip Selected Mixed Fund returned 95% last year largely due to betting on makers of baijiu, the Chinese white spirit. As his fund sank -- it’s lost 21% in the past month -- his investors began calling him offensive names such as “Kun the dog.”

Qi Youdi, a housewife in Ningbo, invested 35,000 yuan in Kun’s flagship fund in early January before selling all her units as stocks fell.

“I’m not buying any fund products right now,” Qi said. “Who knows how much further the market could drop? I have no idea what’s happening next. Is the bull market over? Is a bear market coming? Bear markets typically last a long time in China and then you’ll be stuck, losing money.”

Chinese Mutual Funds Are Shedding Talent and Alpha: China Today

The CSI 300 Index gained 2.5% on Thursday, narrowing the decline from its Feb. 10 high to less than 12%. Stocks had slumped after officials warned of asset bubbles, prompting concern that China will tighten monetary policy in the near future. Moutai, which surged 30% in six weeks to be worth more than $500 billion, plunged more than 25% in one of the world’s biggest shareholder losses.

“Investors panicked when the market retreated, especially those who had just bought stock funds,” said Anson Zhang, an investment manager with China Merchants Bank Co. in Shanghai, who is responsible for the sale and promotion of mutual fund products. “Some redeemed their investments as soon as the market dropped.”

The fickleness of clients adds to the challenge for fund managers, whose performance is measured weekly. About 30% of investors hold on to a fund for less than a month and 21% sell it after one to three months, according to a recent survey conducted by finance magazine Caixin.

Ant Group Co., which has sold mutual funds to more than half a billion people via its Alipay app, appealed on Tuesday for patience as the CSI 300 turned negative for the year.

“Investors should keep calm in face of volatility,” Alipay said in a letter posted on the app. “Short-term market fluctuations won’t hurt the long-term value of equity investment.”

Huatai-PineBridge Fund Management Co.’s He Qi says there’s nothing fund managers can do but “let go” when investors complain about the performance of funds.

But there’s little doubt the attraction of funds has been tarnished for now.

“Investor confidence has been shattered,” the fund manager said. “I don’t expect another fund subscription frenzy to repeat any time soon.”

©2021 Bloomberg L.P.

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