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QFIIs underperform local equities in volatile market

By Zhou Yan (China Daily)
Updated: 2009-01-15 07:56

China's qualified foreign institutional investor (QFII) scheme trading A-shares underperformed domestic equity funds in 2008, posting an average loss of 65.05 percent, according to fund research firm Thomson Reuters Lipper.

However, the funds on average still beat the benchmark index, which fell 65.95 percent over the past year.

Data from Lipper also showed that in December, the eight QFII A-share funds that have released their figures, bucking the downtrend, advanced 0.11 percent on average, but still performed weaker than the local equity funds' 2-percent gains.

"If compared with equity fund which allocates 60 percent of its portfolio into the stock market, QFII poured larger capital of over 80 percent into the market. Therefore, when the market crashed, the latter would suffer more," said Xav Feng, head of research for China at Lipper.

Related readings:  China grants QFII license to UOB Asset Management  Societe Generale, Credit Suisse granted QFII licenses  QFII showed bigger appetite for A-shares in Q3  CSRC official refutes report on cross-border fund flow

The study also found that passive funds tracking CSI 300 Index lost 66.67 percent in 2008, while active funds investing in some of the same blue-chip stocks slid 63.46 percent.

"During a volatile market like 2008, actively managed funds that picked a quality portfolio are more likely to win out than the time when the market is flat or surging, " Feng said.

By the end of 2008, authorities had approved 72 QFIIs since the funds were introduced in 2003, among which 20 were granted last year.

But foreign investors have never stopped clamoring for more, even as the State Administration of Foreign Exchange (SAFE) increased the total QFII quota from $10 billion to $30 billion in December 2007.

Swiss investment bank UBS, which holds the largest QFII quota of $800 million, said the bank is waiting for regulatory approval to hike its investment quota.

"We have increased our purchase of A shares heavily last November and December, when the central government released a 4 trillion yuan (economic) stimulus package," said Nicole Yuen, head of China equities at UBS, on Monday.

But she added that the proportion of QFII transactions in the secondary market remained low, only accounting for less than 5 percent of the total capitalization on A-share market, which reached capitalization of 9.96 trillion yuan as of Tuesday.

"The regulatory authorities should continue to relax the QFII quota to meet increasingly foreign investment demand to the country's stock market," Yuen said.

The SAFE has approved $2.86 billion QFII investment in 2008, sending the accumulated quota to $12.8 billion, according to a China Securities Journal report Wednesday, citing an unidentified person familiar with the matter.

Industry experts said foreign investors started turning positive after a dramatic market adjustment in 2008.

"Investment demands in A share markets are always there as the proportion of China's economic aggregate in the world keeps mounting," Echo Hu, a fund manager from a Shanghai-based asset management advisory, said.

"Sectors such as insurance, banks, and infrastructure constructions are more likely to be picked up by fund managers," Feng said.