Wealthy investors returning to QDII funds

Interest in foreign markets among wealthy Chinese has picked up, prompting qualified domestic institutional investors (QDIIs) to apply for more quota and launch more products, observers say. But the mainland market is largely driven by mass-retail investors, who don't seem to be showing the same appetite.

HSBC received a further $1.4 billion of QDII quota last month, taking its total to $3.2 billion. It has surpassed Citi as the foreign bank with the largest QDII quota. The UK bank first obtained a quota, $500 million, in August 2006 and six months ago received an additional $600 million.

Citi and DBS each obtained additional quota of $500 million in January and May, respectively. And Standard Chartered received an extra $400 million in December, said Shanghai-based consultancy Z-Ben Advisors.

Demand for overseas exposure is being partly driven by the weak performance of domestic markets. China’s CSI 300 has dropped 1.7% year-to-date, compared with an S&P 500 gain of 8.7%.

Some QDII products have been able to capture that upside. Twelve QDII funds investing in US equities have reported year-to-date gains ranging from 1.87% to 12.93%, while 16 QDII funds investing in global equities have posted returns ranging from -0.34% to 7.97%, according to Morningstar.

HSBC in June launched three currency-hedged renminbi funds and products invested in Asian, European and global equity markets. In its QDII range, the bank now offers structured products and bond and open-ended funds from third-party managers.

“That implies the bank has a view that demand for QDII products will rebound,” said Ivan Shi, a senior manager at Z-Ben Advisors.

Demand is coming from mass-affluent and high-net-worth individuals, HSBC’s core mainland customers, said Z-Ben.

Guangzhou-based GF Fund Management, which manages nine QDII funds, says it has seen QDII fund inflows, mainly from sophisticated investors. In the second quarter, GF had a total of 949 million units in QDII funds, up 8 million units from the first quarter.

“They understand the overseas market and capital market changes,” said a company spokesperson. "Their risk tolerance is higher than domestic mass equity investors."

These sophisticated investors are more interested in passively managed QDII products than actively managed ones. GF said developed-market index products, especially those based on US real estate and the Nasdaq 100, have been well received as they are comparatively easy to understand.

However, retail investors’ appetite has not yet returned, as they are not comfortable with foreign assets, said a China-based QDII fund manager. The mainland market is primarily driven by retail investors, and as of last month, QDII mutual fund AUM stood at Rmb53.4 billion, down from Rmb58.4 at the end of 2013.

Chinese retail investors were hurt during the 2008 financial crisis. Although some foreign markets are now providing better returns than China’s domestic market, mass retail investors there are sentiment-driven, he added.

“The sluggish performance in the domestic market has also dampened local investors’ confidence in the overseas market,” said the QDII manager.

Moreover, retail investors are not knowledgeable about global asset allocation, he added.

Domestic wealth management and trust products and money market funds are also luring them away from QDII products. For example, money market funds and bank wealth management products generally provide yield of about 5%.

Competition among QDII fund providers is prompting some firms to become more innovative. China Asset Management, for example, plans to launch an asset management plan that invests in Chinese e-commerce site Alibaba’s US initial public offering.

Reignited interest in the QDII scheme has come after an inauspicious start. The first QDII funds were launched in 2007, totalling assets of Rmb11.95 billion ($1.9 billion), but went on to suffer huge losses, which resulted in yearly net redemptions from 2008 to 2013.