In China, it seems the most regulated investment products have the smallest marketshare.
Among China’s wealth management products distributed by banks and private fund management (such as hedge funds and private equity), “mutual funds have the most regulated framework, which means they can best achieve the aim of both buyers and sellers taking responsibility.
“However, the scale of mutual funds reached only RMB 9.16trn ($1.33trn), or 10% of the overall [asset management industry]”, said Hong at a forum in Beijing yesterday, according to a transcript from AMAC.
Mutual funds collectively hold only 3.4% of the total market capitalisation of A-shares, a historical low, Hong said.
As of 2016, there were about 200 million mutual fund investment accounts opened by indiviudals in China and 85% of them had assets below RMB 50,000 ($7250).
“Mutual funds are overlooked in terms of value and as a long-term investment,” Hong said.
Frequent turnover
Mainland investors do not treat mutual funds as a long-term investment tool. According to Hong, 44% of investors hold mutual funds for less than one year, and two-thirds of them redeem in three years.
There is also frequent turnover in buying and selling the funds, which is evident in the gross sales figures.
Gross sales of mutual funds are 2.2 times higher than the assets under management. For money market funds, which are included under the umbrella of mutual funds, gross sales are 4.5 times more than the the funds’ overall AUM.
However, it is not only investors who have short-term investment horizons, but China’s fund managers as well, he continued.
Hong pointed out that some mutual fund houses operate in a way to favour the interests of the major shareholders.
“The industry relies too heavily on external sales channels, which try to maximise the profits by frequent subscriptions and redemptions,” he said.
“There’s also a lack of a long-term reward scheme for investment talent, leading to unstable management teams and a high turnover rate.”
Turnover rate for fund managers hit the peak at 24.4% in 2015, and 12.5% last year, he added.
In addition, Cao Wei, China Construction Bank consumer deposit and investment deputy general manager, in a roundtable at the same forum said that mutual funds in the mainland have been chasing institutional money since last year, which works against the purpose of mutual funds serving retail investors.
The push for long-term
Currently, China has different sets of regulations for products managed by fund houses and banks, as well as trusts and insurance.
Hong’s suggestions include a unified regulatory framework and tax-neutral policy on fund products, improved corporate governance for fund houses, promoting environmental, social and governance investments as well as real estate investment trust (REIT) products.
“Standards should be set for funds that are open for either public or private subsriptions. Mutual funds should target non-specific clients and make sure the products have simple structures, low or no leverage, with high liquidity and free subscriptions and redemptions.”
He believes that the to-be-launched mutual fund-of-funds (FOF) products can encourage long-term asset allocation, instead of speculative bets.
