Returns of some of last year's top-performing Chinese funds tumbled in the first half of 2011, burnt by bets on small-cap stocks which had previously boosted performance, data from Thomson Reuters Lipper shows.
Equity funds in China posted a negative return of 7.9% on average in the first six months, underperforming the Shanghai stock benchmark index by more than six percentage points, the data shows.
Many growth-company-focused funds, such as the 1.4 billion yuan (USD 216.6 million) Everbright Pramerica Mid-Small Cap Equity Fund, lost more than 15% in unit value.
"Winners last year became losers in the first half due to the slump in small-cap stocks while top performers benefited from their relatively conservative strategies," said Zhang Haochuan, analyst at Shanghai-based fund consultancy Z-Ben Advisors.
"But with the market rebounding recently and some investors becoming more aggressive, it's still too early to judge who will be smiling on the last day of this year."
Past performances play a significant role in attracting new investors and cash to the funds industry. Companies with a market value of USD 1 billion or less are generally considered small caps.
The Shanghai Composite Index fell 1.6% during the first half. By contrast, an index tracking small- and medium-sized enterprises slumped 12.7% while Shenzhen's Nasdaq-style second board plummeted 24.8%.
Mutual funds' assets under management in China slipped to 2.3 trillion yuan from 2.4 trillion yuan six months earlier, despite the launch of more than 100 new products.
But in a sign of recovering optimism, mutual funds polled by Reuters last week raised their suggested equity weightings over the next three months to an eight-month high of 85.6%, betting inflation will stabilise and further tightening will be limited.
Top performers
The 7.6 billion yuan China Southern Longyuan Sector Focus Fund, delivering a 6.89% return in the first half, was the top performer among China's 242 equity funds that were launched before the end of 2010, according to Thomson Reuters Lipper.
Only 13 equity funds, which focus their portfolios on blue chips such as financial and energy shares that survived this year's sell-off, posted positive returns.
For example, China Southern Longyuan's main holdings include China's top energy giant PetroChina, No. 2 mobile carrier China United Network Communications and shipbuilding giant China Shipbuilding Industry Corp, according to its first-quarter report. The fund is managed by Wang Hui and Jiang Pengchen.
Highlighting the short-lived nature of stardom in China's fund industry, many of last year's best performers dropped to the bottom of the ranking list, hit by small-cap stocks.
Yinhua Domestic Demand Equity Fund, which posted a return of 35% in the second half of 2010, was the worst-performer in the first half of this year, with a negative 20.4% return.
The Everbright fund, the second-best performer in the second half of last year with a 50.84% return, is the second worst performer so far this year after posting a 19.76% loss in unit value.
The fund, managed by Yuan Honglong and Li Yang, built heavy holdings in companies including Suzhou New Sea Union Telecom Technology Co, information security technology firm Aisino Co Ltd and Dhc Software Co Ltd, according to its first-quarter report.
"We have seen a flood of sector-specific or SME-focused funds launched in recent years, and they're typically more volatile than funds that invest mainly in blue-chips," Z-Ben's Zhang said.
"The change in product structure is one reason why equity funds in general have underperformed the benchmark index so far this year."
Mixed asset funds, which invest more in bonds, also suffered, losing 7.2% on average during the January-June period.
That compares with a 0.63% return for bond funds, 1.54% return for money-market funds and a negative 2.6% return for overseas investment funds launched under the Qualified Domestic Institutional Investor (QDII) scheme.
But instead of seeking safe havens in bond and money-market funds, as was previously the case during stock market bearishness in China, many investors are parking their money with banks, which are aggressively competing for funds by selling high-yielding wealth-management products in a bid to meet regulatory requirements on loan-deposit ratios.
(USD 1 = 6.465 Chinese Renminbi)
