Lion FMC's gold fund tipped as fundraising surprise of 2010

Lion FMC’s Global Gold Fund attracted almost Rmb800 million ($120 million) on its first day of fundraising on December 10, with such a strong result possibly pointing to the start of inflation-hedging as a product-development strategy.

China Merchants Bank alone sold Rmb400 million as a distributor. The fund is Lion FMC’s first product for qualified domestic institutional investors (QDII) and China’s first global gold fund.

Consultancy Z-Ben Advisors suspects that Lion’s gold fund could be the biggest fundraising surprise on the upside in 2010, even taking into account that gold as an asset class has been in strong demand amid growing concerns over inflation.

The average fundraising result for QDII funds during the second half of this year has been around Rmb650 million.

Stronger demand for Lion’s fund, which primarily tracks Gold ETFs listed on various international exchanges, is not unexpected, given inflationary worries. Last week, China reported that its consumer price index had increased 5.1% in November, hitting a 28-month high.

The fact that gold as an asset class has been a top performer – up 62% over the past two years – would have played a part in helping Lion to start so strongly. The product has a cap of Rmb3.3 billion, which could be reached well in advance of the formal close to the fundraising process.

“This would then suggest that investors are willing to tolerate currency uncertainty, the fact that the RMB could appreciate faster in the coming months, as a necessary premium to gain better return potential, while at the same time providing some degree of a hedge against inflation,” says Francois Guilloux, director of regional sales for Z-Ben Advisors based in Shanghai.

Z-Ben predicts inflation-hedging as a product development strategy will be primarily centred around commodities, precious metals, treasury inflation-protected securities (Tips) and energy, for both domestic and QDII funds.

Yinhua Fund Management Company has just finished raising Rmb691 million for its Anti-Inflation Thematic Fund, tracking global commodity-related ETFs, mutual funds and Tips.

Commodity-related strategies could piggyback on the fact that China’s first commodity-related fund – China Merchants Global Resources Fund – is the best performing QDII fund in 2010, notes Z-Ben.

Chinese asset manager E-Fund, meanwhile, is also in the process of applying for its own global gold QDII fund, while a handful of fund management companies are in the process of developing domestic energy-themed products.

Lion’s result, combined with the results of other QDII funds that recently finished fundraising, would suggest that there may be a higher possibility for upside surprises in the QDII space in the next few months, suggests Guilloux, noting that Harvest raised in excess of Rmb1 billion earlier this year.

The QDII arena, especially for fund management companies, has become more competitive by the day and, accordingly, product differentiation has become an increasingly important determinant of success, says Z-Ben.

“As Lion’s fundraising result would suggest, substantial rewards may await those who dare to take the road less travelled,” adds Guilloux, adding that the reverse could be true if FMCs follow the beaten path – as the Rmb291 million raised for the Huatai-Pinebridge Asian Leading Equity Fund might suggest.