Passives drive equity fund flows in China

This year, capital has generally flowed out of equity funds, which had global net outflows of $175bn, according to data from Morningstar Direct.

In Hong Kong, SFC-authorised equity funds had net outflows of $3.9bn this year ending August, according to data from the Hong Kong Investment Funds Association.

But in China, domestic investors continued to pour money into equity funds, which had net inflows of RMB 100.5bn ($14.3bn) this year, according to Morningstar data.

Chloe Qu, Shenzhen-based manager research analyst at Morningstar, believes that the inflows are largely driven by the growth of passive equity strategies.

Growth of passive strategies

She explained that the Chinese regulators have been encouraging domestic managers to launch more equity products, especially index mutual funds and ETFs, with the aim of institutionalising — bringing more stability — to the domestic stock markets.

In China’s stock markets, the share of equities held by mutual funds remain below 5%, she added.

“The Chinese regulator aims to stimulate stock market stability by attracting more medium and long-term money into the market. Mutual funds now have been identified as one of the key institutional forces that can provide long-term investment capital while correcting momentum trading habits,” Qu said.

“Since the beginning of the year, the regulator has been encouraging asset managers to develop more index products. In October, it also issued window guidance to streamline the process for registering equity products.”

Qu added that the regulator wants the domestic industry to be more competitive in the passive space, as the gradual opening up of the domestic fund industry will bring in global fund houses and index providers to the market.

“They also want to make sure that local fund houses are gearing up for the competition.”

As a result, many domestic fund houses have rolled out passive strategies this year, according to Qu, but she was not able to provide numbers.

According to a recent Cerulli Associates report, the competition in the passive space has been heating up, with an increasing number of new theme-based ETF listings, such as state-owned enterprise reform and smart beta ETFs using momentum and low volatility factors.

The response from investors has been positive. Assets of passive equity and bond products, grew 84% to RMB 632bn at the end of the first quarter from 2017, according to data from Cerulli.

Passive strategies AUM in China (RMB bn)

Source: Cerulli Associates

“From the investor’s perspective, both active and passive equity products have been well-received this year, mainly due to the market’s strong performance,” Morningstar’s Qu said.

“The technology, media and telecommunications sector has fared particularly well, which makes it one of the most popular choices among investors,” she added.

Among the different equity categories in China, traditional onshore equity funds were most favoured by investors, with RMB 15.9bn in net inflows, followed by technology and communications sector funds, which had RMB 12bn in net inflows, according to Morningstar data.

China fund flows

Source: Morningstar Direct, data in RMB m