Ricky Ng

Introduction Chinas asset management industry is a rapidly growing market, driven by the increase in affluent Chinese consumers and the development of the countrys financial sector. As more companies list their securities in Shanghai, Shenzhen, and Hong Kong and as local consumers look for higher returns as opposed to interest offered through deposits, more capital will flow into asset managers. Furthermore, more and more multi-national asset managers are looking into China for high returns and portfolio diversification. This paper will introduce the top Chinese asset managers and QFII asset managers, and will analyze the performance and investment styles of the QFII funds. QFII- Qualified Foreign Institution Investors Foreign institutional investors need to receive a permit from the government in order to invest in RMB denominated assets in China. The government places a restriction on the number of investors to control the inflow of foreign capital. There are also restrictions placed on QFII, including not allowed to hold more than 10% of the total shares in a company or a one year lock-up period that wont allow invested capital to leave the country. Currently there are 140 QFII members. Funds

Rank 1 2 3 4 5 6 7 8 9 10
*1

Top China Funds China Asset Management Harvest Fund Management E Fund Management Bosera Asset Management China Southern Fund GF Fund Management Da Cheng Fund Management Yinhua Fund Management Hua An Fund Management Fullgoal Fund Management Total

AUM (USD billions) 44 37 30 29 18 16 15 13 13 9 224

Rank 1 7 2 3 6 4 5

QFII Funds First State China Growth HSBC GIF China Equity Templeton China World Fidelity China Region Fund Dreyfus Greater China Fund JF China Region Fund Matthews China Fund Total

AUM (USD billions) 4 2 1 1 0.471 0.092 0.003 8.566

The fund size of QFII funds are drastically below the fund size of domestic firms. However, the total assets under management for domestic firms are equal to the total assets under management of a medium size global asset management company. QFII Funds Top Down Overview Using research from Morningstar, we determined the general strategy, holdings, sector focus and returns for the leading QFII funds.
YTD QFII Fund Strategy Top Holdings ENN Energy Holdings, Utilities, Energy, CNOOC, Yantai Changyu Wine First State China Growth Large Growth Fund Services, Mindray Medical Healthcare International Overweight China Mobile, China Financials, Construction Bank, Industrial & Energy, Commercial Bank of China, Consumer HSBC GIF Chinese Equity A Large Blend CNOOC, PetroChina, Bank of Discretionary, China, AIA Group, Agricultural Telecom Bank of China, China Shenhua Services, Energy, China Resources Land Materials Overweight Dairy Farm International Energy, Basic Holdings, CNOOC, China Materials, Petroleum & Chemical Templeton China World Large Blend Corporation, PetroChina Co, Cyclical, Yanzhou Coal Mining Consumer Company Defensive, Consumer 11.13% 18.75% 5.30% N/A Company, China Oilfield Goods, Consumer 6.07% 17.08% Sectors returns annualized 3 yr

Technology

Overweight Industrial and Commercial Financial Bank of China, Taiwan Services, Fidelity China Region Fund Large Blend Semiconductor Manufacturing, Technology, Real China Construction Bank Corp, Estate, Consumer AIA Group, PetroChina Co Cyclical, Energy Financial China State Construction International Holdings, Hon Hai Dreyfus Greater China Fund Large Growth Precision Ind., Citic Securities Co, CNOOC, Hunan Nonferrous Metals Corporation Services, Technology, Industrials, Consumer Cyclical, Basic Materials Basic Materials, Consumer Cyclical, Financial Services, Real JF China Region Fund Large Blend Not disclosed Estate, Communication Services, Energy, Industrials, Technology, Consumer Cyclical, Cheung Kong Infrastructure Holdings, Tingyi Holding, China Matthews China Fund Large Growth Mobile, Digital China Holdings, Zte Corporation Services, Consumer Defensive, Technology MSCI Golden Dragon Index 11.15% 12.49% Industrials, Financial 9.86% 17.27% 16.06% 10.91% 9.60% 9.93% 10.83% 17.21%

Style Map

Size Large Medium Small

Strategy

Value

Blend

Growth

QFII fund managers general strategy is to focus on large cap stocks with a blend between

value and growth. Common investment sectors include consumer goods, financial services, energy, technology, and telecommunications. Common stock holdings include CNOOC, PetroChina, and China Mobile. On a YTD basis, on average, their returns have underperformed the MSCI Golden Dragon Index benchmark. However, in a 3 year annualized basis, their returns have been much more attractive. To further compare the fund performance, it is important to compare returns on a risk basis.

Fund First State China Growth Fund HSBC GIF Chinese Equity A Templeton China World Fidelity China Region Fund Dreyfus Greater China Fund JF China Region Fund Matthews China Fund

3yr Std Dev Sharpe Ratio 17.53 1.08 33.74 0.46 22.41 0.99 25.59 0.82 33.47 0.56 25.71 0.65 23.99 0.90

First State China Growth Fund has the lowest 3 year standard deviation and the highest sharpe ratio. The most volatile funds are Dreyfus Greater China Fund and HSBC GIF Chinese Equity, and they both have lower performing Sharpe Ratios. Conclusion Although QFII funds make up a very small portion of the Chinese investment landscape in terms of assets under management, their performance has been capable of delivering consistent returns while mitigating risk. From the foreign investors point of view, QFII funds can provide geographic diversification as well as the additional benefit of investing in RMB denominated assets while gaining exposure into domestic companies.

References Pensions and Investments http://www.pionline.com/article/20111031/CHART01/111029899 Templeton China World https://www.franklintempleton.com/retail/app/product/views/fund_page.jsf?fundNumber=680 Matthews China Fund http://global.matthewsasia.com/our-funds/f-13/matthews-china-fund/overview.fs First State China Growth http://www.firststate.co.uk/uploadedFiles/CFSGAM/PdfFundFactsheets/CGVCC.pdf Fidelity China Region Fund http://fundresearch.fidelity.com/mutual-funds/summary/315910778 JF China Region Fund JP Morgan Asset Management http://www.jfchinaregion.co.uk/_documents/jf-china-region-fund-inc-31march.pdf HSBC GIF China Equity http://www.assetmanagement.hsbc.com/uk/attachments/global-funds/monthly-performance-re ports/hgif_chinese_equityic.pdf McKinsey The opportunity in asset management in China https://www.mckinseyquarterly.com/The_opportunity_in_asset_management_in_China_2060 What is QFII in China http://chinastockventure.com/2010/01/what-is-qfii/ China QFII Member List, February 2012 http://chinastockventure.com/2012/03/china-qfii-member-list-february-2012/ MSCI Index Performance http://www.msci.com/products/indices/country_and_regional/domestic_equity_indices/china/p erformance.html Morningstar http://www.morningstar.com/