High market volatility and competition from other asset classes have long dampened the growth of equity fund assets in China. Equity fund and mixed fund assets account for about 22% of China’s total fund assets, which is less than half of the global level, according to the most recent data published by the Asset Management Association of China (Amac) and the International Investment Funds Association. 1
However, as the Chinese economy restructures and market conditions shift, the popularity of equity investment is poised to rise, says Shi Bo, deputy general manager and chief equity investment officer of Shenzhen-based Southern Asset Management, one of China’s largest fund companies 2. By the end of 2019, Southern Asset Management had assets under management of over $150bn, serving more than 100m investors both in China and abroad.
The company is dedicated to providing investors with sustained value. By the end of 2019, both the three year and five year overall rate of returns of the company’s actively managed equity funds ranked among the top quartile of peer funds, according to Haitong Securities’.3
“Equity fund assets have great growth potentials because historic figures have shown that the stock market could generate satisfying long-term returns,” Shi says.
Changing environment
Shi’s confidence is backed by recent market momentum. According to Amac, equity fund assets logged a robust growth rate of 46% in 2019, and a 5% increase in share of total fund assets compared with 2018. Behind the stellar performance are a 22% rise in the Shanghai Composite Index and a 44% jump in the Shenzhen Component Index last year. But Shi believes that bullish sentiment aside, there are more fundamental reasons supporting the trend.
“The first is that the economic cycle driven largely by property development is near its end, and investors will soon realise that the return on equity of public companies is becoming more attractive than buying and holding real estate,” Shi says, adding that the dividend yield of blue-chip companies is also rising gradually. According to CSI Index Co, even as the Chinese economy continued to slow down, A-share companies paid investors a total of $145.4bn in dividend in 2019, 8% more than in 2018.
The second reason is that investors are more committed to the idea of long-term investment. As investors shift funds away from real estate and money market funds, the average holding period of equity fund shares are increasing, Shi says. Institutional investors, led by China’s social security fund, are also leaning towards longer-term results when evaluating fund managers’ performance, with some even abolishing the assessment of single-year result. In December 2019, 10 fund rating firms, including Morningstar’s China branch, announced in a joint open letter that they would stop awarding funds based on their annual performance. Instead, they pledged to help lead investors’ attention to longer-term yield of the funds.
Last but not least, promoting equity investment and the idea of value investing have been prioritised by Chinese policy makers. Last September, the China Securities Regulatory Commission rolled out new rules to simplify the registration process for qualified equity funds in support of their growth. In a meeting this January, the regulator reiterated the importance of increasing the share of equity fund assets and expanding the source of mid-to-long term funds.
“Regulators, investors and fund managers…you can feel that everyone’s mind-set is changing,” Shi says.
Harnessing the power of research
To capture this gigantic opportunity, Southern Asset Management has been bringing out new equity funds focused on sectors such as advanced manufacturing, healthcare and consumption. When China’s Star board kicked off last April, the company was among the first seven managers that received approval to launch Star-related themed funds, successfully fulfilling its quota of $140m. The fund was oversubscribed by more than 23 times. Until mid-January, the fund was leading its peers in investment returns as well.
“We believe funds with a clear sector focus have the most potential,” says Shi, who started managing funds in 2004. “Sector funds allow managers to deep dive into certain industries just like many of the primary market investors do. Only when managers study and become real experts of the sector, can they achieve a fine balance between investment returns and fund size. ”
Shi adds: “We are also rolling out more funds with lock-up periods from one to three years. These funds will help investors curb their impulsion to speculate, and once they realise that lock-up periods can be beneficial for them, they may voluntarily lengthen their investment perspective.”
At Southern Asset Management, fund managers and researchers are divided into different groups based on investment styles and the sectors they cover, which facilitates communication and synergies within the teams, adds Shi. At the same time, Shi also encourages brainstorming and debate between different groups of managers, which help them give each other new perspectives and ideas.
“As one of the oldest fund companies in China, research is in our DNA,” Shi says. “And we have a great culture of apprenticeship, which ensures that our rich knowledge and experience are passed on to the fresh blood.”
Competition is motivation
Southern Asset Management is not the only fund company trying to take advantage of the momentum.
The Chinese market is known for extremely fierce competition. And after China decided to lift the limits on foreign shareholding of fund companies this year, global fund houses such as BlackRock and Fidelity are also keen to join the action.
Some analysts expect wholly foreign-owned enterprise funds to soon start encroaching on domestic firms’ territory when it comes to investing, fundraising and, perhaps more importantly, talent acquisition.
“My prediction is that in three years, foreign fund companies could generate a profound impact on our industry,” but in a good way, Shi says. He elaborates that globally established fund houses could bring in leading investment philosophies such as ESG investing, which may help make market participants more rational and long-term focused.
Shi believes that the entrance of global challengers will only accelerate the growth of equity fund assets in China.
“Competition is a good thing for us; for what we do, no one but the market can decide who the real leader is. The pressure will help us bring out our ‘A’ game.” Shi says.
1 Cut-off dates of AMAC and IIFA data are end of December 2019 and end of September 2019, respectively.
2 On March 6, 1998, China Southern Asset Management Co was officially established as one of the first domestic asset management companies approved and regulated by the China Securities Regulatory Commission. As of December 31, 2019, Southern Asset Management and its subsidiaries have a scale of combined assets under management (AUM) that totalled $153.9bn.
3 Fund Companies Performance Ranking data published on January 2, 2020.
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