Chinese investor interest in equities remains tepid

Chinese investor interest in equities remains tepid
By Mark Konyn

Published: May 30 2010 10:23 | Last updated: May 30 2010 10:23

In April I participated in a panel discussion at a conference on current trends in the Asian fund management industry. During the discussion the audience was asked whether the global financial crisis had affected both investor attitudes and fund manager relationships with their distributing partners. All but 10 per cent believed this was the case.

Most noticeably, investors had lost confidence in equities through the crisis resulting in strong flows to bond funds and flows generally out of mutual funds. This trend has continued at different times since, particularly when Asian and global equity markets have been stressed.

Advisors in China confirm this pattern of investor behaviour, with strong flows into money market funds at the end of last year, and flows out of mutual funds as a whole during the first quarter of this year. The latest report shows the industry lost more than 9 per cent of its assets as the Chinese stock market lost more than 6 per cent in the first three months of this year.

Continued downward pressure on China’s stock market, as investors cope with on-going government and central bank efforts to curb speculation and rein-in bank lending, is likely to depress the mainland’s rapidly developing fund industry when margins are under pressure as shelf space among the handful of national distributors remains scarce.

Attempts to restart the market for funds that invest overseas have been met with indifference by China’s investors. It seems the global crisis is likely to have stalled interest in overseas investing for some time, despite a belief among distributors and managers alike that index investing may provide the catalyst.

Curiously, whereas exchange traded funds open up alternative distribution for funds in other parts of the world, in China they are placed inside a mutual fund and distributed through the retail banks, reducing some of their advantages. Hopes that securities companies would develop as a key distribution channel for mutual funds in China have not been realised. It seems the domination of retail banks is set to continue, despite the proliferation of security accounts held by individuals, which was reported to have reached 168m by the end of last year.

In common with the rest of the Asian region, the Hong Kong economy has recorded a strong rebound in the first quarter of the year. This has been accompanied by strong flows back into equity-based mutual funds for Hong Kong, of $6.4bn (£4.4bn, €5.2bn) in the first quarter, with China focused funds accounting for $1.3bn of this total.

Foreign nationals looking to take advantage of the Capital Investment Entrant Scheme and qualify for Hong Kong residency can invest some of the required HK$6.5m ($834,000) into qualifying mutual funds and this is expected to attract continued flows as the scheme matures. The scheme includes Chinese nationals who have established residency overseas, and many wealth management groups are now targeting such people.

Client segmentation more generally is becoming a point of focus for distributors across Asia. The financial crisis is causing the main fund distributors and wealth management groups to rethink their approach to addressing client needs, with greater emphasis on understanding how different investors require different strategies.

The Lehman mini-bond debacle, which saw investors in Hong Kong, Taiwan and Singapore lose money when the investment bank failed, emphasised the need for best advice when approaching clients with sophisticated structures and strategies. Wealth management groups that offered the mini-bonds have been criticised on the basis that clients were unaware of the credit risk involved in such products.

Rather than adopting a single approach to all clients, wealth management groups are introducing different services with varying levels of advice for different clients. There has been a rather muted regulatory response to the financial crisis so far across the region, maybe as the region’s regulators wait to see how the authorities in Europe and the US react. The provision of advice and investor protection is expected to figure prominently in any proposed changes, providing another possible driver of greater client segmentation in Asia.


Mark Konyn is chief executive of RCM Asia Pacific