China Southern fires BNY Mellon; hires Wellington

Jul 9, 2009

China Southern says it has terminated its QDII advisory deal with BNY Mellon. Wellington will step in to become the firm's overseas strategic advisor.

China Southern Fund Management says it has terminated its QDII advisory deal with BNY Mellon, effective July 6. Wellington will replace BNY Mellon as China Southern's strategic advisor, providing the company with investment research and portfolio advisory services. Southern did not comment on the reason for the termination.

The Shenzhen fund house was the first company in the industry to be approved by the China Securities Regulatory Commission (CSRC) to launch a QDII fund in September 2007. At the time, Southern raised close to $8 billion for the product. As of the end of March this year, the fund had total assets of Rmb12.92 billion ($1.89 billion).

The fund manager has also made changes to its portfolio management team, saying portfolio manager Michael Wan will no longer run the QDII fund. Wan was a QFII investment manager that Southern poached from Hang Seng Investments in 2006.

Three fund managers will now share responsibilities for the fund. The trio comprises: Southern's head of international investment Xie Wei-hong, a Taiwan-native and former star manager responsible for Japanese equities at Shin Kong Securities Investment Trust; Li Hao-dong, a former hedgie from FBR and EJF Capital with a dual PhD from MIT and Harvard; and Wang Liang, a portfolio manager who has been on the team since 2007.

According to data from Lipper, the fund has recorded a loss of 37.6% since launch. Year-to-date, it has recorded a gain of 17.51%, although it is still the second worst performing product in its category. China Asset Management's QDII fund is up 28.33% this year, while the QDII funds managed by Harvest and China International are up 25.91% and 26.11%, respectively. The three firms launched their QDII funds at around the same time as Southern.

Aside from a string of Hong Kong-listed H-shares and red-chips which Southern manages in-house, in reality its QDII fund is a cash allocation product with 65% of its assets allocated to foreign exchange-traded funds (ETFs), trusts and institutional share class funds.

At the end of 2008, top fund holdings in the portfolio included: 10.89% in Goldman Sachs Liquidity Reserve Fund; 8.24% in iShares MSCI Brazil managed by Barclays Global Investor; 5.8% in Van Eck Associates' Market Vectors Russia ETF; 5.02% in the US Natural Gas Fund (ETF) and 4.75% in United States Oil Fund, both managed by Victoria Bay Asset Management; 4.14% in Fording Canadian Coal Trust managed by Canada's Computershare; 3.88% in Deutsche's Powershares DB Commodity Index Tracking ETF; another 2.79% in Van Eck Associates' Market Vectors Agribusiness ETF; 2.74% in State Street Global Advisors' Energy Select SPDR ETF and 2.51% in Deutsche's Powershares DB Agriculture ETF.

Observers say the fund's obvious lack of focus has led it to become over-diversified. The results have diminished BNY Mellon's value-add in helping Southern to make strategic and tactical asset allocation calls.

For its second QDII, Southern says it plans to pursue a passive strategy. It has signed a deal with Standard & Poor's to develop a product based on the popular S&P 500 index. S&P has since exchanged a memorandum of understanding with the Shenzhen Stock Exchange in furthering the development of ETFs and index-based products in China.