China moves to allow retail sales of mutual fund of funds

Added 21st June 2016

Retail investors in China may be allowed to invest in mutual fund-of-funds later this year after the release of a consultation paper from the China Securities Regulatory Commission (CSRC).

China moves to allow retail sales of mutual fund of funds

So far fund-of-funds (fof) products - mutual funds that invest in mutual funds - are primarily sold to institutional or high net worth investors in China who buy through fund houses, asset managers or brokers.

The only fof products currently available for mainland retail investors are funds under the Qualified Domestic Institutional Investor (QDII) program, Niki Wu, a Morningstar China analyst told our sister publicatin Fund Selector Asia.

The QDII fofs, with assigned quotas, invest in offshore products such as mutual funds, but primarily ETFs, she said.

Fof products have an estimated total assets under management of RMB 40bn ($6.1bn) in mainland China, according to China Fund News.

CSRC’s proposed rules are aimed at introducing fofs to retail investors.

The regulator stated that a mutual fund types of fof would invest 80% or more of assets into registered mutual funds (excluding other fofs). Each mutual fund invested in cannot exceed 20% of the fof’s net asset value.

The fof is not allowed to invest in structured funds, or any other share classes of funds with a derivative feature.

Lacking multi-asset funds

Wu noted that fof products fit with onshore investor demand. 

"The rising fluctuation in the stock and bond markets in recent years and the superior performance of commodities since this year has driven China investors focusing more on stable long-term returns through asset allocation.

"FoFs that invest in a variety of funds including equity funds, bond funds, commodities funds, and other alternative funds, would be an attractive product offering an asset class variety, especially in the absence of real multi-asset allocation funds in China," she noted.

Most allocation funds in the market still have a heavy focus on equities, she explained.

Some local fund houses have been selling fund of mutual funds to professional investors, said Rachel Wang, Morningstar China director of manager research.

She added that experience with professional investor separate accounts can be applied to retail investors after the implementation of the new regulatory policies.

The move is also likely to encourage fund houses to expand their product lines to offer more non-mainstream products, Wu added.

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