Key Takeaways
- • Chinese fund managers are increasingly launching "sponsored" equity funds seeded mostly with their own capital, as regulators press firms to revive a stock market at five-year lows, according to Reuters.
- • Sponsored funds need only 10 million yuan (about $1.39 million) of seed money, held for three years, versus the normal 200 million yuan (nearly $28 million) in assets and 200 investors required for new funds.
- • The number of sponsored equity and balanced funds rose nearly 40% to 122 last year, per fund consultancy Z-Ben Advisors.
- • A total of 148 equity and balanced funds were liquidated last year for being too small to be viable, the most in five years.
- • Analysts including UBS's Lei Meng warn the fundraising drought and falling stock prices feed a "vicious cycle" that erodes long-term investor confidence.
Summary
Chinese fund management companies are increasingly launching equity funds funded largely by their own money, as securities regulators pressure the industry to help revive a stock market that has fallen to five-year lows, Reuters reported. The regulator has informally told some managers to launch at least four equity funds before opening any new bond fund, a measure some analysts believe is unlikely to succeed in propping up the market.
The vehicles at the center of the trend are so-called "sponsored funds." Under Chinese rules, a manager can start such a fund with 10 million yuan ($1.39 million) of seed capital that must stay in the fund for three years, far below the 200 million yuan (nearly $28 million) in assets and 200 investors normally required before launch. Sponsored funds charge the usual management fees and will be wound up after three years if they fail to reach the 200 million yuan threshold. According to Z-Ben Advisors, the number of sponsored equity and balanced funds rose nearly 40% to 122 last year. Leading sponsors include China Asset Management, E Fund Management, China Southern Asset Management and Fullgoal Fund Management. Examples cited include Wanjia Asset Management's 10 million yuan pharmaceutical stock fund and Galaxy Asset Management's materials equity fund, in which Galaxy contributed 10 million yuan, or 98.9% of fund assets, after securing only four subscribers.
The push comes amid weak investor demand. Blue-chip CSI300 index has extended its decline into the new year, raising doubts about the effectiveness of policy measures announced since mid-last year. Last year, 148 equity and balanced funds were liquidated for being too small to be viable, the most in five years. A Shanghai-based portfolio manager preparing a sponsored fund said that "in such a environment, you can hardly raise money," adding that managers have "no choice but to invest with your own money first." UBS Securities China equity strategist Lei Meng said weak fundraising and a sliding stock market feed each other "in a vicious cycle that dents long-term investor confidence."
Bond funds remain more popular with investors, but regulators have slowed approvals for fixed-income products while speeding approvals for equity funds. Managers see an approved equity fund as a prerequisite for bond fund launches, and some hope fresh products will re-engage investors who have suffered losses and redemptions in existing funds. Hedge fund manager Zhang Kaihua said managers are taking money from their own pockets because "fund performance is ugly and clients are suffering from losses." China Southern Asset Management declined to comment, and other named managers did not immediately respond to requests for comment.
The vehicles at the center of the trend are so-called "sponsored funds." Under Chinese rules, a manager can start such a fund with 10 million yuan ($1.39 million) of seed capital that must stay in the fund for three years, far below the 200 million yuan (nearly $28 million) in assets and 200 investors normally required before launch. Sponsored funds charge the usual management fees and will be wound up after three years if they fail to reach the 200 million yuan threshold. According to Z-Ben Advisors, the number of sponsored equity and balanced funds rose nearly 40% to 122 last year. Leading sponsors include China Asset Management, E Fund Management, China Southern Asset Management and Fullgoal Fund Management. Examples cited include Wanjia Asset Management's 10 million yuan pharmaceutical stock fund and Galaxy Asset Management's materials equity fund, in which Galaxy contributed 10 million yuan, or 98.9% of fund assets, after securing only four subscribers.
The push comes amid weak investor demand. Blue-chip CSI300 index has extended its decline into the new year, raising doubts about the effectiveness of policy measures announced since mid-last year. Last year, 148 equity and balanced funds were liquidated for being too small to be viable, the most in five years. A Shanghai-based portfolio manager preparing a sponsored fund said that "in such a environment, you can hardly raise money," adding that managers have "no choice but to invest with your own money first." UBS Securities China equity strategist Lei Meng said weak fundraising and a sliding stock market feed each other "in a vicious cycle that dents long-term investor confidence."
Bond funds remain more popular with investors, but regulators have slowed approvals for fixed-income products while speeding approvals for equity funds. Managers see an approved equity fund as a prerequisite for bond fund launches, and some hope fresh products will re-engage investors who have suffered losses and redemptions in existing funds. Hedge fund manager Zhang Kaihua said managers are taking money from their own pockets because "fund performance is ugly and clients are suffering from losses." China Southern Asset Management declined to comment, and other named managers did not immediately respond to requests for comment.
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