China Southern QDII fund launch nears $6.7 billion

In the July edition of AsianInvestor magazine, we noted that, although most market participants were sceptical that qualified domestic institutional investment (QDII, the program to allow mainland investment abroad) would catch on right away, some recent bank products had done quite well. ICBC, for example, raised $585 million in June for its first equity QDII fund.

ôIf the early outings by BoC and ICBC are anything to go by, the QDII industry is set to blast off,ö we wrote.

And blast off it has. Industry sources in China report that Shenzhen-based China Southern Fund ManagementÆs inaugural QDII mutual fund raised something in the neighbourhood of RMB50 billion ($6.7 billion) in a single day.

Yes, thatÆs $6.7 billion in US dollars.

The launch eclipses the A-share blockbuster from Harvest Fund Management that raised around $5 billion in November. China Southern officials could not be contacted yesterday evening to confirm this figure.

The sheer scale of this offering will stun many who believed that China wasnÆt ready to embrace QDII, not in the heady environment of a bullish A-share market and an appreciating renminbi. It will particularly surprise those whose benchmark for QDII mutual funds was last yearÆs damp squib offering from ShanghaiÆs Huaan Fund Management, which was the pilot product.

There are several reasons for the successful launch, suggests Z-Ben Advisors, a Shanghai-based consultancy, which predicted the fund would succeed (it issued a report expecting China Southern to raise up to $2 billion, which was considered bullish).

First, QDII is a high priority for the central government, which sees this as the best way to address the issue of the renminbiÆs value versus the US dollar, without having to resort to blunt revaluations that would damage its exports or make Beijing be seen as caving into American political demands. The failure of QDII to take off last year prompted a rash of policy changes to make it more appealing (see AsianInvestorÆs July edition for a full history of QDII).

Secondly, the product itself has been improved. Huaan executives, fearing that QDII wouldnÆt be popular, opted for a capital-guaranteed fund that invested in a wrapper note, with four international funds serving as the underlying assets. The end result capped potential returns and was expensive, with total fees of 2.8%. Lehman Brothers served as HuaanÆs sub-advisor.

The China Southern product, on the other hand, is far more aggressive. Details are not yet known but industry sources believe its Southern Global Enhanced Balanced Fund invests up to 40% in Hong Kong-listed securities and the rest in two dozen or so Hong Kong-authorised mutual funds across asset classes. This product is not about diversification û a concept that would puzzle most Chinese investors. Rather itÆs about providing good returns.

And while those returns may not match the A-share market, investors seem to have flocked to it because ChinaÆs mutual fund companies have an excellent reputation. They are better regulated and enjoy more trust than brokers, trust companies or banks. Most fund houses have good track records, and China Southern, as the largest and among the oldest, is well regarded.

It probably didnÆt hurt that the A-share market blue-chip benchmark fell 4.7% on Tuesday, on the back of fears that rising inflation in food prices would force the government to raise interest rates, thus making bank deposits a more appealing alternative to domestic stocks. If investors worry about the A-share marketÆs volatility, then a QDII fund that can return more than 6-7% per annum, run by a trusted organisation, starts to look attractive.

Lastly, total fees are 2.15%, making this fund more attractive than HuaanÆs, and closer to the total 1.75% that an investor might pay for a domestic equity fund, notes Z-Ben.

BNY Mellon was recently named China SouthernÆs global custodian in expectation of its QDII debut. It is not clear exactly what role Mellon Global Investments played, although industry players guess that China Southern decided on the foreign asset classes that would most appeal to local investors, and relied on Mellon to select the actual underlying funds.

Perhaps the biggest celebration will come from those firms that are next in line for a QDII fund launch. These include China Asset Management (with T. Rowe Price), Harvest (with shareholder Deutsche Asset Management), China International Fund Management (with shareholder JPMorgan Asset Management), Fortis Haitong Fund Management and Fortune SGAM Fund Management.

The biggest question their executives may be asking is how much of the money China Southern gets to keep: its fund had been given a quota of $2 billion by the State Administration of Foreign Exchange.