So far the FoF products primarily serve institutional or high net worth investors in the mainland who buy through fund houses, asset managers or brokers.
The only FoF products currently available for onshore retail investors are funds under the Qualified Domestic Institutional Investor (QDII) program, Niki Wu, a Morningstar China analyst told FSA.
The QDII FoFs, with assigned quotas, invest in offshore products such as mutual funds, but primarily ETFs, she said.
FoF products have an estimated total AUM of RMB 40bn ($6.1bn) in mainland China, according to China Fund News.
CSRC’s proposed rules are aimed at introducing FoFs – mutual funds that invest in mutual funds — to retail investors.
The regulator stated that a mutual fund type of FoF would invest 80% or more of assets into registered mutual funds (excluding other FoFs). Each mutual fund invested in cannot exceed 20% of the FoF’s net asset value.
The FoF is not allowed to invest in structured funds, or any other share classes of funds with a derivative feature.
Lacking multi-asset funds
Wu noted that FoF products fit with onshore investor demand.
“The rising fluctuation in the stock and bond markets in recent years and the superior performance of commodities since this year has driven China investors focusing more on stable long-term returns through asset allocation.
“FoFs that invest in a variety of funds including equity funds, bond funds, commodities funds, and other alternative funds, would be an attractive product offering an asset class variety, especially in the absence of real multi-asset allocation funds in China,” she noted.
Most allocation funds in the market still have a heavy focus on equities, she explained.
Some local fund houses have been selling fund of mutual funds to professional investors, said Rachel Wang, Morningstar China director of manager research.
She added that experience with professional investor separate accounts can be applied to retail investors after the implementation of the new regulatory policies.
The move is also likely to encourage fund houses to expand their product lines to offer more non-mainstream products, Wu added.
