If 2007 was the year in which Chinese investors fell in love with mutual funds, what are we to expect from 2008? Based on current progress, it may be the year in which fund managers see their egos punctured and their bonus checks decimated.
The first quarter of the year was not good for China’s stock markets, or anyone else’s for that matter. The Shanghai Composite Index (SCI) finished March down 29%, its worst quarterly performance on record.
The index also had a rough time of it in the final three months of 2007, posting a 20% decline, but the mutual fund investors hung in there, with assets under management rising by 5%. Not so this year. Assets under management were down 24% in the first quarter of 2008, according to reports.
However, this is not the most shocking fund management statistic to emerge in recent weeks. Pride of place goes to the fees earned by China’s fund managers in 2007 for sinking people’s hard-earned cash into what was then a buoyant A-share market. The fund managers made a whopping US$4 billion in fees, up from US$813.9 million the previous year. Put those figures in context: The SCI more or less doubled in value last year; fund management assets nearly trebled; fund management fees grew by close to 400%.
The overriding irony here is that only 14 of the 180 equity funds operational in 2007 actually managed to beat the CSI 300 Index. While it is tempting to suggest that China’s fund managers effectively earned US$4 billion for doing nothing out of the ordinary, it is also unfair. It is not unusual for funds in a volatile, fast-growing market to trail the index.
Furthermore, fund managers in China are said to keep a relatively large portion of assets in cash to cover the frequent redemptions by investors who are still focused on the short-term gains.
In the months ahead, growth in assets under management and management fees will be more moderate than last year – but this doesn’t mean a fund manager’s value will fall.
The turning point for mutual funds in 2007 was the May 30 hike in the stamp duty levied on stock market transactions. Shares slumped and scores of individual investors got burnt, but the funds emerged with minimal losses. With this timely reminder that industry professionals are better at picking stocks than taxi drivers, investors placed their money and faith in the funds.
If 2008 continues as it has begun, a fund manager who can spot a dog from a darling could be worth his weight in gold.