China is a major player in the global fund industry. Blockbuster fund initial public offerings (IPOs), which have seen popular new funds being oversubscribed and sold out within a day after sales commence, have become more common in the country over the past few years. While short-term investor sentiment has been hurt by the recent market downturn, Cerulli Associates points out in its latest analysis that the trend could resume over the long run.
China’s mutual fund assets under management, including that of ETFs, recorded robust year-on-year growth of 37.5% to reach 19.7 trillion renminbi (3 trillion dollars) in 2020. Total assets garnered through mutual fund IPOs reached 3.2 trillion renminbi, double the size in 2019. The average IPO volume of new funds also improved to 2.2 billion renminbi, compared to 1.5 billion in 2019.
Local media reports show that in 2020, over 100 new funds were sold out within one day after subscriptions commenced, and 15 of these IPOs successfully garnered assets of over 10 billion renminbi. “The trend continued in the beginning of 2021, according to China Fund News reports, when a total of 122 new mutual funds were rolled out in January, raising assets of almost 500 billion renminbi, the second largest monthly amount for IPO assets recorded in the market”, Cerulli says.
Among the factors behind blockbuster new fund launches the firm identified are optimistic investor sentiments, star managers with good track records, and sufficient liquidity in the market. Over the past few years, the Chinese government has introduced a series of monetary easing measures to stimulate the economy following the U.S.-China tensions and COVID-19 pandemic. “Part of the money supply went to the real economy and real estate market as traditional long-term investment vehicles for local residents, while the rest was available to asset management products. This created plenty of opportunities for mutual funds, as other investment products in general are not attractive enough”, they add.
In this sense, some managers Cerulli spoke with said that the fast-track fund approvals introduced by the China Securities Regulatory Commission (CSRC) have also facilitated their new fund launches. Extensive marketing efforts and digital distribution have also supported mega fund launches.
Following this year’s Chinese New Year holiday, the stock market plunge dampened investors’ interest in new fund launches. However, despite the potential challenge to fundraising, the firm’s analysis shows that managers focused on the long term are still upbeat about the industry’s prospects, and are “confident that mega fund launches will resume if the stock market turns bullish again”.
In Cerulli’s view, mutual funds’ long-term growth prospects should continue because profits earned by listed enterprises which survived COVID-19 will eventually enter the stock market, and funds have an inherent advantage over other financial products.
“The cooling of market sentiments is normal, and it is also an opportunity to educate small-ticket young investors who have not experienced many market cycles. As long as the recovery does not take too long and a bear market is avoided, the long-term outlook for mutual fund IPOs should remain positive”, said Ye Kangting, senior analyst at the firm.