China Southern unveils QDII plans with S&P

China Southern Fund Management is signing an exclusive agreement with Standard & Poor's to develop a second QDII fund.

Contrary to local media reports, Eric Fu, chief marketing officer at Southern, says no specific agenda has been set for the cooperative arrangement. Southern is looking at the full range of indexing capabilities that S&P provides and considering the possibility of developing products that tap into S&P's indices in US equities, Asian equities, and even its more innovative strategy-embedded products.

Actively managed products have suffered from poor sales for the past year. Given the largely indistinguishable market in China's fund management industry, there is little that fund managers can do that adds alpha to investment returns. As a result, Fu says, more Chinese investors have become disillusioned and are attracted to the better performance provided by local passive products.

So rather than partner with an active manager to help develop its second QDII fund, Fu says Southern has chosen an index provider that is internationally recognised.

S&P's competitors MSCI and FTSE have successfully secured key relationships with government funds and local index developers, while Dow Jones is still playing catch up in China. S&P's competitors have also managed to secure relationships with fund managers setting investment benchmarks referenced to their indices.

However, the deal with Southern will potentially mark the first successful entry by a foreign index provider in penetrating the China QDII market with a passive offering.

Though, Fu admits that the poor appetite for equities products is likely to mean that China's fund investors will favour fixed-income and money-market products for most of 2009.

Fu stresses Southern's partnership with S&P has only just begun -- the two firms are actively looking for ways to improve the stale sales that have characterised the China market of late. It is still premature to discuss fund sizing or even a target timeline for the potential launch.

Southern's overseas investment fund launched in September 2007 was one of the first official QDII funds. Since then, the fund's AUM has more than halved from $5 billion to just $1.34 billion as at the end of 2008.

Advised by BNY Mellon and managed by Michael Wen, a former QFII manager from Hang Seng Investments in Hong Kong, the Southern Enhanced Global Allocation Fund is now in reality a cash allocation product with a 65% position allocated to foreign ETFs, trusts and institutional class shares.

These include: 10.89% allocation to Goldman Sachs Liquidity Reserve Fund; 8.24% to iShares MSCI Brazil 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 by Victoria Bay Asset Management; 4.14% in Fording Canadian Coal Trust 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.

Just about a quarter of the fund's AUM is invested in actual stocks. These include the H-shares of heavily traded names such as China Construction, China Mobile, China Life, Cnooc, China Oilfield Services, China Shenhua, China Merchants, CNPC and Tencent Holdings.

The rest of the fund is largely placed in money-market instruments for liquidity purposes.