Lehman Brothers was Hua An’s foreign advisor when the Chinese fund management company launched the pilot
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| Okita: Diversifying is key | |
QDII fund in November 2006. Today, in a market that just left buoyant days behind, foreign advisors are looking at the next big question – how to find something attractive to the retail investor today and at the same time a good investment for the long term.
Bradley Okita, managing director of the Investment Management Division at Lehman Brothers, says the experience of working with Hua An has been successful in terms of understanding Chinese retail investors behaviour and Chinese products. The challenge, nevertheless, is to explain to retail investors, who see their friends making 50% or 100% gains from the Chinese market, that they may lose just as much.
Okita, who was involved in Hua An’s QDII fund, emphasizes that it is important to diversify. “For example, investing in Vietnamese funds as part of a broader asset allocation might be interesting, but it is risky to have all your eggs in one basket. You see reports on the news about individuals walking up to the bank teller with a suitcase of cash saying ‘give me a Vietnam fund’, and it causes a little concern.”
This is exactly what most Chinese retail investors do. They tend to put a lot of money in one fund in the hope that the fund will go up 50% to 100%, while in more sophisticated fund markets, investors are inclined to invest in wrapped products, in which there is a range of funds with a certain asset allocation to satisfy the risk/return requirement.
Okita sees the retail fund market in China today as somewhat trend-driven, just as most of the foreign markets, including Japan, when they first opened up. He points out that a decade ago, Japanese retail investors were looking for “the next hot product or market” to put money in, and as soon as they made a profit, they would move on to the next hot thing. “This was frustrating for fund managers and it was probably not the best thing for retail investors,” he says.
It was when Japanese banks also joined the retail fund distribution business and took a different approach in selling funds, that the figures started to show a tendency towards long-term products. “It is natural sometimes to let your emotions run away with you (in a bull market). If you have got distribution channels paid by commission, there is sometimes the temptation to just go with the hot product,” Okita says.
Another factor that can be attributed to the Japan retail fund market’s sophistication was the development of the annuity business. When investors buy variable annuities or investment-linked products, they tend to think farther ahead and start to invest for the long term.
Hua An fund is balanced
The challenge of global time zone differences also arises as many of the Chinese fund management companies are eager to take part in global trading in order to steepen their learning curve for offshore investments. For instance, a QDII fund that invests in US equities may be advised by a US portfolio manager in New York. So if a Chinese company wants to execute the trading on its own, it first needs to wait for the advice that is sent all the way from its US counterpart in New York. However, in an ever-changing market, the advice may no longer be appropriate by the time the Chinese fund manager starts his day in China. “When a US manager makes a recommendation to buy a US stock, you hope it is a good recommendation at that time, but what if the price of that stock shoots up before the trader in China wakes up? You can put limit orders and most of the time these are long-term investments, but still, it is a challenge,” Okita says.
Hua An’s QDII fund was officially launched on November 2 2006 as a market pilot scheme. As of the end of the same month, the fund’s net asset value (NAV) was 1.0190 and it grew to a record 1.0500 six months later on May 31 2007. As of March 31 2008, the fund’s NAV retreated along with the global market to 0.9870.
Hua An’s QDII fund is designed to be a global, balanced product, which allocated about 35% of its assets to equities when it first launched, 45% to fixed income and 10% each to REITs (real estate investment trusts) and commodity funds. While the few QDII funds which came into the market afterwards are in pure equities – in some cases concentrated only on one or two markets – Hua An’s product has a lower risk level. Okita says the design of the product and its risk level was a collaborative effort of both Hua An and Lehman, with lots of inputs from the CSRC, as it was a pilot programme.
The two fund management partners today still hold regular meetings every month to exchange market views and discuss asset allocation. Okita says they often exchange ideas on the next QDII fund, but have no timetable to launch any product this year amidst the global market turmoil.
