China fund AUM growth flatters to deceive

China’s mutual fund industry grew at its fastest pace for seven years in 2014, although this was overwhelmingly driven by money-market funds and remains well below its 2006-08 peak.

The industry grew 52% year-on-year to end-2014 at Rmb4.56 trillion ($733 billion). It comprises 94 mutual fund managers and 1,897 products, including offshore qualified domestic institutional investor (QDII) funds, finds data from China Galaxy Securities.

During the A-share bull-market of 2006 and 2007, the industry saw its assets surge 82.6% and 282.5%, respectively. However, the years since have proved volatile.

The industry suffered a -40.8% AUM decline in 2008. It also saw falls of -5.9% and -13% in 2010 and 2011, respectively, while it recorded moderate growth of 38%, 31% and 4.7% in 2009, 2012 and 2013.

But before analysts can point to signs of a recovery in risk appetite, the fundamental reason for the industry’s apparent resurgence was money-market funds (MMFs).

China’s 427 MMFs surged 150% last year to stand at Rmb2.2 trillion. Beijing-based Tianhong Asset Management became the largest fund house thanks to its innovative partnership with online payment platform Alipay to launch the Yu’E Bao MMF.

Tianhong has seen its AUM treble to Rmb590 billion since launching the fund, with its six MMFs accounting for 98% of its AUM and 26% of MMF assets in China.

Ivan Shi, an analyst at Shanghai-based consultancy Z-Ben Advisors, attributed the popularity of MMFs in China to the link with online payment platforms.

“It [Yu’E Bao] introduced a new business model for MMFs. It is no longer treated simply as a product for investors, but as a cash management tool for average consumers. I think this will allow MMFs to continue to grow in 2015.”

But he questioned whether MMFs would see such strong growth this year, raising doubts that Alipay would be able to expand its user-base and payment volume at the same pace and questioning whether other online platforms would be as successful as Alipay. China's rate cut has also been tipped to hit MMFs, as reported.

Shi noted, too, how Chinese fund houses tended to launch MMFs at the end of the year to increase AUM for a better market share ranking. He said such products would likely see a decline in the first quarter of this year, as they had in the past.

Fellow Z-Ben analyst January Sun noted how fund management firms backed by banks had enjoyed growth. “Some Chinese banks launched similar products to Yu’E Bao last year, channeling investors’ bank account savings into MMFs,” Sun said.

CCB-Principal Asset Management, a joint-venture between China Construction Bank and Principal Financial Group, grow 66.5% last year and China Merchants Fund, a subsidiary of China Merchants Bank, surged 111%.

Sun attributed such fundraising success to the banks’ distribution networks.

Interestingly joint venture ICBC Credit Suisse AM saw 131% asset growth last year driven by good equity fund performance last year, noted Sun.

Nevertheless, a rebound in the A-share market in the second half of last year – The CSI300 index has surged 64% since mid-July to 3,546 at close on January 9 – did little to bolster fund house assets.

Equity funds overall saw 12.6% year-on-year growth to Rmb1.8 trillion, with actively managed equity funds rising less than 1%, while passive equity funds grew 65%.

The industry saw inflows of Rmb50 billion into equity funds in the third quarter of last year, but Rmb100 billion in outflows over the same period.

Sun noted that retail investors habitually redeemed old funds to buy newly launched ones, with banks incentivised to churn funds to earn higher commission fees.

Shi said investors’ risk appetite depended on whether the stock market rally could be sustained, and whether equity funds could continue to deliver good performance.

“Although equity and balanced funds have seen outflows in the last three months of last year despite strong CSI300 performance, we have noticed that good-performing funds have drawn inflows. In other words, investor demand is starting to follow good performance,” Shi observed.

The question then becomes whether the rally will last long enough to encourage investors back into equity funds, added Shi.

“After years of weak stock market performance [mainly the CSI300, as ChiNext had been very strong for several years], investors may perceive the rally we are seeing will be short-lived and thus will be unwilling to commit long-term investment.”

Shi suspected the A-share market would need to perform strongly for a quarter, or at least break the current 3,400 for the SSE Composite index, to convince investors to commit. “Fingers crossed for that, but the general economic condition does seem not to support this,” he said.

The SSE Composite Index dropped 3% in 30 minutes on January 9 after touching 3,400 – an important target that some analysts have set in their outlook for A-shares.

While Shi was reluctant to make A-share forecasts, he noted some sectors such as financials were approaching their 2007 peak. “That might indicate approaching volatility,” Shi concluded.