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Fund houses turning sellers

By Bi Xiaoning (China Daily)
Updated: 2009-09-16 08:05

Institutional investors are fast becoming speculators at the bourses and not acting as market stabilizers, going by the trend seen last month.

According to statistics from financial information provider Dazhihui, institutional investors, including funds, insurers, and qualified foreign institutional investors (QFII), were competing with each other to offload shares in August.

During the month, the capital outflow was nearly 129.92 billion yuan, the most so far this year.

The CSI 300 Index, a gauge that tracks the performance of the Shanghai and Shenzhen bourses, fell 21.81 percent in August, the second-biggest monthly decline in 15 years.

"What is significant is that most of the funds are simultaneously adopting the same investment strategies. Most of them remained cautious and subdued in the first quarter, but turned active and bought shares in the second quarter and then sold shares heavily in the third quarter. So, we see a high turnover rate for most funds," said Lu Junlong, analyst, China Finance Online, a NASDAQ-listed finance group.

According to TX Investment Consulting Co, the average turnover rate of funds in the first half grew 3.24 times over the same period last year. In 2008, the funds' average turnover rate was 2.09 times in the first half and 1.98 times in the second half.

According to TX Investment Consulting, small fund management firms are more likely to have a higher turnover rate with the figure going up nearly 10 times over same period last year in some cases.

Related readings:  Mainland fund assets set to top $1 trillion  China sovereign fund eyes infrastructure, green energy  Foreign investment in China up 7% in August  Investors still keep the faith

"The investment convergence for institutional investors could be attributed to several factors, including severe pressure for fund managers to maintain the rankings of the funds they manage," said Hubert Tse, management director and head of the international business group at Shanghai-based Yuan Tai PRC Attorneys.

"The fund managers would be engaged in more short-term rather than long-term investment strategies to achieve a credible ranking. So, we see many fund mangers opting to follow the investment decisions of leading peers," Tse said.

The big-point drops/increases on the A-share market have forced institutional investors to opt for flexible investment decisions as the capital market remains fragile, immature and speculative in nature.

"Institutional investors are also hampered due to the lack of investment products. The market and its participants, including both retail and institutional investors, are still relatively young and still developing when compared with the more mature markets in the US and other Western countries," said Tse.

Institutional investors have started to play a lead role in the Chinese capital market from 2008. According to China Securities Depository and Clearing Co, institutional investors held 54.62 percent of the A shares in circulation last year, with funds holding 20 percent of the market share.

"In mature markets, like the US, institutional investors hold nearly 80 percent of the market share and the financial products are more diversified," said Li Daxiao, director of research at Yingda Securities.

China's policymakers also need to actively take measures to plug regulatory loopholes and encourage long-term investment.

The securities regulator recently halted the short-term performance ranking for fund managers. In addition, the State Administration of Foreign Exchange said earlier this month that it would shorten the lockup period for some medium- and long-term QFII funds such as pension funds and insurance funds from one year to three months.

Most of these steps are aimed to facilitate medium- and long-term investment among institutional investors.

"China's A-share market has embraced a fast-growing period in the past 20 years and it's still developing. Looking ahead, we might see a mature market by 2020," said Li.

According to the plan released by the securities regulator in 2008, China's capital market target would be one of the largest, most open and solid in the world by 2020.