Individual investors in China are not capable of managing assets by themselves to preserve and expand wealth, according to research conducted by Zhang Xiaoyan, professor of finance at Tsinghua University.
The research findings, which were included on a China asset management report co-published by the World Economic Forum and Oliver Wyman, show that retail investors accounted for 80% of trading volume on China’s stock exchanges between 2016 and 2019. However, individuals only held 21% of outstanding shares.
In contrast, financial institutions, including asset managers and institutional investors, only accounted for 17% of the total trading volume.
“This points to a defining feature of Chinese retail investors. They are frequent traders, not long-term shareholders,” Zhang said in the report.
Zhang noted that research findings also show that individual investors also have a tendency to buy at highs and sell at lows.
“When it comes to publicly disclosed information, individuals usually cannot sharpen their focus on information related to company fundamentals or process such information. Therefore, they are more likely to make mistakes in the choice of transaction time and future market direction.
“This points to weak wealth management capabilities in Chinese individual investors, who can hardly achieve the objective of preserving and growing their wealth in the stock market if they make investment decisions by themselves,” Zhang said.
This presents an opportunity for asset and wealth managers to step-in and provide professional advice to investors, she said.
“For individuals who lack capabilities and time to correctly process huge amounts of financial information, they are advised to turn to high-quality institutional investors to help them make investments, avert risks and grow wealth,” Zhang said.
Mutual fund investments
Retail investors have also shown the same behaviour when it comes to mutual fund investing in the past, in which they have treated them like stocks, according to Jasper Yip, principal at Oliver Wyman’s financial services practice.
“This is more characterised by the rally especially during 2015 where thematic funds were actively chased by retail investors when they got excited about the market sentiment on certain themes,” he told FSA.
However, there are signs that investors are now looking at fund products as long-term investments, thanks to the investor education efforts made by domestic asset managers, according to Ivan Shi, director of data analytics at Z-Ben Advisors.
“Investments with a focus on themes [continue to be popular]. However, [unlike before], retail investors are likely to view these as long-term investment trends rather than short-term investments,” he told FSA.
He added that retail investors’ awareness of financial products has significantly improved in the past two-three years. For example, individuals have started to invest in ETF products in 2018. Previously, it was only institutions that invested in ETFs.
However, like other individual investors globally, Shi acknowledged that Chinese investors may behave irrationally at times if not properly guided by an asset or wealth manager.
“As the CSI 300 Index has increased so much, retail investors may be driven irrationally to buy more ETFs and actively managed products,” he said.
