China's love for new mutual funds cools after tough year

A tumultuous year for Chinese markets looks to be finally weighing on demand for new stock funds.

While equity funds have raised 2 trillion yuan ($314 billion) this year - matching 2020's record - fundraising this quarter is poised to be the slowest in two years, according to data from consultancy Z-Ben Advisors. Launches have slowed through the year as economic recovery loses steam and China's crackdown on private enterprise dampens sentiment.

It's no surprise that interest is waning. Mom-and-pop investors who rushed to buy products as the market climaxed in February have been on a choppy ride. Stock funds tracked by China Securities Index returned a weighted average of 5.7% this year, but are down 6% from this year's high when inflows were largest. While the year-to date figure is still an outperformance by around 11 percentage points against the benchmark CSI 300 Index, it is a letdown compared to market-trouncing annual returns of over 40% in the past two years.

Wendy Wang, who works in the education sector in Shanghai, is among those who have been through a test of patience after purchasing a flagship product managed by Invesco Great Wall Fund Management Co.'s Liu Yanchun in late 2020. "I'm still 7% in the red, but I still trust Chunchun and plan to buy further dips," referring to a pet name for the portfolio manager.

Liu's fund is down 8.5% this year in total return terms after suffering a drawdown as deep as 32%, a performance that is difficult to stomach for investors used to stellar results over the last two years.

He is joined by a crowd of high-profile portfolio managers providing less than impressive returns. The E Fund Competitive Dominant Enterprises Mixed Fund is down nearly 6% since its January inception, while ZhongOu Medical and Health Mixed Fund is down 4.3%.

Chinese savers have fewer avenues to invest than peers abroad thanks to the nation's capital controls. Still, fundraising in 2022 will likely slow further as muted returns put off investment decisions, said Samuel Gong, analyst at Z-Ben Advisors in Shanghai. "After a disappointing year for most, especially severe blows for those who joined the rally late, the excitement for mutual funds will revert to the mean," he said.