“ More than half of mainland China’s investment managers have less than two years’ experience, according to Beijing-based research firm TX Investment Consulting Co. A third have been managing funds for no more than a year.”

 

It really cringe me to see the low quality of investment managers in China. The China equity market bubble will burst, and I think it will be sooner than most people think.

 

Yours Financially Free,

Willy Lim

 

 

Published December 13, 2007

Market’s dive tests China’s fund managers

More than half have less than 2 years’ experience; a third, not even one year

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(SHANGHAI) Zhao Zifeng helped investors double their money in his first six months of managing the Sitico Morgan First Growth Fund. The streak ended in October as a six-week market drop erased more than 20 per cent of the fund’s value.

‘I’m feeling the heat,’ said Mr Zhao, 37, who was promoted in March from head of research to run the US$1.6 billion mutual fund for Shanghai-based China International Fund Management Co. ‘As a newcomer, I still need to accumulate the experience dealing with a falling market.’

More than half of mainland China’s investment managers have less than two years’ experience, according to Beijing-based research firm TX Investment Consulting Co. A third have been managing funds for no more than a year.

They had it easy until November, when the CSI 300 Index fell 17 per cent, the steepest monthly decline in its two-year history. The index had risen almost six-fold until then.

While the CSI 300 has rebounded 7.8 per cent in December, investment strategists at New York-based Morgan Stanley and Goldman Sachs Group expect more losses. History suggests they may be right.

The Shanghai Composite Index fell 20 per cent from its peak in October to Nov 30. The past five times that the index dropped 20 per cent or more, losses deepened to an average 35 per cent before the market stabilised.The Shanghai index plunged more than 50 per cent from June 2001 to July 2005.
‘A prolonged stock market decline will provide a real test for China’s fund managers,’ said Tiger Tong, an analyst at China Knowledge Pte Ltd in Singapore. ‘Most of them are momentum investors who just go with a rising market.’

Fifty-nine investment management companies in China oversaw US$422 billion at the end of September, up from 17 companies in December 2001, according to China’s securities industry regulator.

The US has 630 companies managing US$4.3 trillion in diversified equity mutual funds, according to US research firm Lipper Inc.

‘Given the sharp increase in number of fund management companies and products, it’s only to be expected that the average experience in the industry will decline,’ said Peter Alexander, principal at Z-Ben Advisors Ltd in Shanghai.

Li Shuo, who started managing a US$134 million fund in Shenzhen a month ago, said that he’s reading up on the Internet bubble of the late 1990s and the end of Japan’s boom in the 1980s to prepare for a slump.

‘Fund managers have so far been able to deliver returns quite easily with the bull market, but I think that’s about to change,’ said Mr Li, 36. He asked that his company’s name be withheld because of concern over censure from the securities regulator.

‘Though I’ve seen market ups and downs as an analyst, it’s still my first time managing so much of other people’s money,’ said Mr Li, who’s buying shares of companies that report stable earnings growth. He declined to identify them.

For Luca Frontini, chief executive officer of Lombarda China Fund Management Co in Shanghai, hiring and keeping experienced professional investors has been a major challenge amid the boom.

‘The pool of talent is limited,’ he said. ‘There’s strong competition for fund managers and it’s extremely difficult to hire and retain good managers.’

Analysts including Morgan Stanley’s Jerry Lou foresee tougher times for Chinese fund managers. The CSI 300’s decline may result in companies posting investment losses in the fourth quarter, which could be the ‘final push on the snowball to start its roll downhill and crush the biggest equity bubble in the world today’, Hong Kong-based Lou wrote in a Nov 20 note to clients. — Bloomberg