China’s Retail Investors Fall Out of Love With Mutual Funds

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(Bloomberg) — China’s retail investors are quickly cooling their enthusiasm for mutual funds.

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New issuance of equity and mix-allocation funds – the latter also mostly exposed to stocks – has fallen to 16.4 billion yuan ($2.5 billion) in the two weeks through April 14, according to UBS AG data. That’s less than 10% of the amount raised in March and puts April on track to be one of the worst months for fund launches in well over a year.

Small investors were stung after star funds fell victim to slumps in bellwether stocks like liquor maker Kweichow Moutai Co. and solar energy giant LONGi Green Energy Technology Co. Shares of both firms tumbled following the Lunar New Year break in February, helping send the benchmark CSI 300 Index into a technical correction. A hugely popular equity fund that drew in a record 237 billion yuan in late January is now down around 4% since its inception.

The month’s dearth of issuance is in stark contrast to the boom in launches in January, when as much as 450 billion yuan was raised. Just 26 new funds have been issued this month through April 14, compared with 163 for the whole of last month.

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In China, parts of the retail crowd converted to mutual funds in 2020, attracted by market-trouncing returns, whereas in the U.S., people forced into lockdowns went on stock-picking sprees. Chinese individual investors especially bought into funds helmed by star managers who focused their allocations on blue-chip favorites. That led to a self-fulfilling cycle where these stocks soared as did the indexes they were in.

“Leading tier-1 companies” have another 20% to fall in valuations before becoming attractive, UBS analysts including Meng Lei wrote in a note last week. As trading in these stocks remain dominated by existing mutual funds, the market may stay “weakly volatile,” they added.

While this may all just be a brief blip in the craze for mutual funds, analysts reckon the numbers show increasing disillusionment given recent fund performance.

“Without new funds and new investors, opportunities for returns, if any, will be short-lived,” said Wei Tao, managing director of Shanxi Fengshang Investment Management Co.“Crowds and conviction are absent and until that changes, existing funds with a shorter term view will gradually exit.”

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