SHENZHEN, China - Enough is enough, even
in China's tearaway stock markets, at least for
one pioneering fund manager who has liquidated his
firm's mainland assets and claimed ignorance of
what is happening in the market there.
Some peers of Zhao Danyang, founder and
general manager of Pure Heart Asset Management,
have praised his decision; others say the Chinese
markets are still in bull mode and there is plenty
profit still to be made.
Fund-managed
assets in the mainland swelled to more than 3
trillion yuan (US$416.7 billion) last year as the
Shanghai Composite Index soared to its record high
of more than 6,000
point
in October. A fall to below 5,000 was followed by
a year-end rally that ran through to January
before the index continued its decline to about
4,383 yesterday.
The average return of
open-ended stock investment funds was more than
100% last year, their gains helping to inspire
tens of millions of Chinese investors to put their
money in various funds.
Many market
analysts and fund managers remain optimistic about
the outlook of yuan-denominated A-share market
this year and confident that fund investment can
have another "golden year", despite recent
turbulence. Some private funds have become more
cautious and conservative, with Zhao leading the
way in pulling out of the market in fear of a
continued downturn.
Zhao, whose Pure Heart
was an influential officially approved "private
fund" management firm, announced the termination
of business to liquidate five mainland funds under
its management on January 2, 2008.
Zhao
established a private securities investment fund
to invest in the A-share market in 2004; it is
believed to have been the first "sunny", or
officially approved private fund, in the mainland.
He was praised as the "godfather" of China’s
private funds for his vision and legendary success
in fund management when the market at the time was
dominated by bears.
So his decision to
liquidate all of his firms’s five mainland private
funds right after the New Year was like a stone
thrown into a quiet lake.
"We would rather
miss an opportunity than blindly take a reckless
move under whatever [market] circumstances,'' Zhao
wrote in a letter to his clients before the
liquidation. "To survive in each investment
decision is always our priority."
Zhao
predicted in 2005 that the Shanghai Composite
would bottom out from 1,000 to a high plateau of
3,000 to 5,000 points in three to five years. He
was absolutely right about the trend but wrong on
the pace.The index climbed to 5,000 in just about
one year.
From April 2004 to June 2005,
when the Shanghai index plunged from 1,700 to
1,000, Zhao’s Pure Heart Fund I of A shares made
an investment return of 25%. In Hong Kong, the
Pure Heart Fund that continues there had gains of
500% by mid-January since its inception in 2003.
Zhao was becoming cautious when the
Shanghai Composite reached 3,000 in early 2007
although he did set up two new funds at the
beginning of last year. Both had achieved
relatively mild returns of some 20% at the time of
the liquidation. Meanwhile, the Shanghai stock
index soared by 93% and most public funds invested
heavily in A shares had revenue growth of more
than 50%.
"So far, the A-share and H-share
markets are beyond our understanding.” Zhao wrote
in his letter, with H-shares referring to Hong
Kong-listed mainland-related stocks. "The bottom
and peak of the indexes are always a riddle. Now,
we can’t find any proper investment targets which
meet our investment criteria and have enough
margin of safety as well."
He became the
first manager to terminate active "sunny private
funds" when the market was still considered a
bull. In the investment fund circle, in particular
in the eyes of his peers in private funds, he was
regarded as a moral leader for his early retreat.
Li Chunyu, general secretary of Shenzhen
Financial Consultant Association, said the
termination of Pure Heart funds of A shares was
sudden but not unexpected. "It is normal for a
private fund to terminate when opportunities of
investment vanishes. It happens almost every day
in overseas markets."
Li consoled Chinese
investors who were used to witnessing the opening
of new funds in the bull market in an article
addressing the liquidation of Pure Heart funds.
He praised Zhao for his honesty. "To be
faithful is the cornerstone for the survival and
growth of private funds. Zhao is honest with his
clients about his understanding of the market and
returned the money to them. Not every private fund
manager has his courage, which is also a challenge
to the public funds."
Liu Mingda, manager
of Shenzhen Mingda Capital Management, said Zhao
is a responsible person because otherwise he could
still rein in management fees even if he continued
running the funds at a loss.
Though
admiring his bravery and accountability, most
private fund managers are not as pessimistic as
the prudential Zhao. New private fund products
were launched one after another from December last
year through trust companies. Shenzhen
International Trust and Investment Co Ltd (SITIC)
helped establish 13 such private funds in
December. In the first week of 2008, a total of
seven new private funds were being promoted
through trust companies.
"There is a
common saying that China will experience Ten
Golden Years [of bullish markets],'' said Lin
Yuan, manager of Lin Yuan Investment Management
Company in a private fund promotion meeting
sponsored by SITIC on January 27. "I believe we
will have 15 golden years. We have cheap labor and
growth no country can surpass."
Lin, a
doctor-turned private fund manager, is a legendary
speculator and investor himself. He is reported to
have started with an investment of 8,000 yuan in
stocks in 1989, building this to 400 million yuan
by the end of 2005. Lin set up his first "sunny
private fund" through SITIC in February 2007 and
another two in September. By the end of last year,
his first first fund had a return of investment of
60% and the other two less than 4%.
Various security investment funds in China
were big winners in last year’s bull market.
Fund-managed assets jumped to 3 trillion
yuan from 856 billion yuan at the end of 2006. The
number of investors' accounts in security
investment funds boomed to 90 million last year
from 14 million in 2006.
The sunny private
funds were generally out-performed by public stock
funds last year. A recent private fund rating
showed that 10 out of 53 private funds recorded
100% returns while half of public stock funds
doubled their income last year. The average growth
of net assets value of private funds was less than
40% in the first half of last year and 20% in the
second half; both were only half the growth of
public stock funds.
"The high yields [of
public funds] are abnormal," Liu Mingda said in
defense of his private fund peers in the recent
promotion meeting. "Even Warren Buffett couldn’t
do that. His average rate of return is some 30%.
Our core target is to seek value investment in the
long run."
He also attributed the
comparatively lower yield rate of private funds to
their different mechanisms. "Public fund managers
care about attracting more investment and winning
the race with the stock index; we care about gains
from our investment. So that’s why we are more
conservative."
Generally speaking, private
funds mainly live on their 20% share of investment
returns while open-ended funds can pretty much
survive on management fees given their large pool
of investors.
Pan Jiang, a Franklin
Templeton Sealand Fund Management analyst, said
the termination of Pure Heart served as an
education on risk to investors.
"Private
funds can liquidate themselves but open-end funds
leave the choice [to redeem] open to investors.
Maybe soon there will be open-end funds
liquidated' by the markets," Pan was quoted as
saying by a Chinese business newspaper.
Candy Zeng is a freelance
journalist based in Shenzhen, China.
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