Chinese fund management organisations are increasingly introducing equities funds that are mostly funded by the company’s own capital in response to strong demand from regulators to assist revitalise a struggling stock market.

As authorities rush to rescue a stock market plummeting to five-year lows, China’s securities regulator has been pressuring fund managers to prioritise and opens new tab the launch of equity products.

The regulator has instructed certain fund managers informally that they must start at least four equities funds prior to opening any new bond funds. This move is intended to support the stock market, however some analysts believe it is unlikely to be successful.

Mutual fund businesses are increasingly creating so-called “sponsored funds” as a result of their frustration with investors’ lack of interest in stocks amid a faltering economy and regulatory restrictions.

Fund management firms can launch sponsored funds under Chinese regulations with as little as 10 million yuan ($1.39 million) of seed money, which needs to stay in the fund for three years.

In contrast, new funds are often required to have 200 investors and at least 200 million yuan, or about $28 million, in assets prior to start.

“Fund performance is ugly and clients are suffering from losses, so money managers have to take money out of their own pockets,” said hedge fund manager Zhang Kaihua. “What else can they do?”

According to fund consulting Z-Ben Advisors, the number of sponsored equity funds and balanced funds—which invest in both stocks and bonds—rose by over 40% to 122 in the previous year.

The performance of China’s blue-chip index has continued to decrease in the new year, raising questions about the efficacy of the various regulatory measures regulators have announced since the middle of last year, despite the outburst of such funds.

Chinese funds are dying almost as quickly as they were created due to the market deadlock. The number of equities and balanced funds that had to be liquidated last year was 148, the highest in the previous five years due to their insufficient size.

Although there is pressure on fund managers to start equity funds, “you can hardly raise money in such an environment,” according to a portfolio manager headquartered in Shanghai who is getting ready to start a sponsored fund.

“Investing with your own money is your only option,” the fund manager, who wished to remain anonymous, stated.

A declining stock market and a poor fund-raising campaign combine “in a vicious cycle that dents long-term investor confidence,” according to UBS Securities’ China equity strategist Lei Meng.

Sponsored funds will be closed up after three years if they do not have the necessary 200 million yuan in assets. Sponsored funds incur standard management costs.

Z-Ben Advisors reports that China Asset Management Co., E Fund Management Co., China Southern Asset Management Co., and Fullgoal Fund Management are among the top sponsors of these funds.

According to a regulatory filing, Wanjia Asset Management Co. established a 10 million yuan fund this month that is nearly fully funded by its own capital and invests in pharmaceutical stocks.

According to a filing, Galaxy Asset Management launched a new materials equities fund in December despite only being able to secure four subscribers. In the end, Galaxy contributed 10 million yuan, or 98.9% of the assets in the fund.

China Southern Asset Management did not want to be interviewed. Requests for response from Wanjia, Galaxy, and the other identified managers of sponsored funds were not immediately answered.

Investors prefer bond funds more than other products, but authorities are approving equity funds more quickly while slowing down the review process for applications related to fixed income products.

“You don’t want to waste it once you get the go-ahead to launch an equity fund,” stated a second fund manager who asked not to be named. “It’s also a condition to launch bond funds.”

The belief among money managers that investors dissatisfied with the performance of current funds will search for new prospects and, consequently, a new lease of life for their business, is another factor contributing to the explosion of sponsored funds.

“Investors have been losing money in existing funds, triggering heavy redemptions and fund liquidation,” said hedge fund manager Zhang. “With new funds, portfolio managers can start afresh.”

(Adapted from StraitsTimes.com)

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