Hong Kong
THREE years after China's stock market trauma, the speculative spirit is far from snuffed out.
The latest playground is mutual funds, where adoration is raining down on star managers with unprecedented force. A fund run by Aegon-Industrial Fund Management raised the equivalent of US$5 billion in one day this year, while another by Orient Securities Asset Management was nine times oversubscribed 24 hours after being launched in November. An equity portfolio offered by E Fund Management raised 4 billion yuan (S$830 million) over just a day this month.
Some see the explosive sales as part of the maturation of China's market, a nod to professionals. Another comparison might be the 1960s Go-Go Years in America, when money flocked to virtually any manager who put together even a few months of outperformance. That era saw giant gains turn into giant losses as sentiment shifted and clients bailed.
"Investors buy these funds to a large extent because their past performance was strong," said Zeng Linghua, director of research at wealth-management service provider Howbuy.com. "They care less about why the returns are good."
At the same time, considering the recent past, it's not all bad. "Now that institutional investors have increased, people will pay more attention to fundamentals and not just stock volatility," she added.
Shanghai shares gained steadily last year, led by large-cap stocks, while Hong Kong equities, accessible to onshore investors via an exchange link, had their best year in eight. Equity funds expanded 8 per cent, after shrinking in the previous year, official data show.
For Chinese policymakers, the question is whether this rise of mega stock funds simply reflects another speculative wave buoyed by last year's market gains or a long-term trend. China has been seeking to boost the role of institutions in the nation's notoriously wild, retail-driven stock market, and drive investors towards more regulated products like mutual funds. These funds still play a minor role in the market, accounting for 4 per cent of free-floating equity value at the end of last year, according to Morningstar.
Yet even regulators have been alarmed by the popularity of some products. In January, they asked asset managers not to "blindly" focus on expanding fund size, citing excessive marketing and the promotion of star managers.
Xie Zhiyu of Aegon-Industrial Fund - whose assets jumped 44 per cent in 2017 - is one of them. His multi-asset fund returned 26 per cent over the past year, compared with an average 2 per cent for similar funds, according to Howbuy.com. That's probably how his new multi-asset fund raised the equivalent of US$5 billion in a day in January.
"Letting professionals handle professional things is something that's being gradually accepted by the market," he said. "Especially over the past two years, the A-share market has gradually become more rational in that valuations are increasingly driven by earnings. The kind of 'story-based valuation' from the past has lost favour."
The US's experience during and after the Go Go Years suggests a single-minded focus on fund returns can be damaging when the market turns. It also remains to be seen whether China's newly-minted star managers can sustain their outperformance, especially since larger funds can often be less flexible. Shanghai stocks are now down about 8 per cent from their January peak.
"Very large funds tend to be launched in the second halves of bull runs," said Ivan Shi, a Shanghai-based analyst at consultancy Z-Ben Advisors. "After you've launched these large funds, if there's market volatility and redemption pressure is large, it'll be a big challenge for the fund manager." BLOOMBERG
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