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Crash Course

Recent market volatility across the board has made investor education a leading priority for China's biggest money managers.

When Wang Yuchun first invested in China’s stock market, in early January 2007, the country’s CSI 300 index of domestic stocks was just above 2,000 points. Only ten months later it had skyrocketed to 5,891, nearly tripling his portfolio, to 800,000 yuan ($116,000) — equivalent to what the 32-year-old Beijing real estate agent could expect to earn in ten years.

As dizzying as the market’s ascent was, its decline has been just as abrupt and severe. Fears about a slowing domestic economy and the impact of the global credit crisis have brought China’s stock market back to earth with a thud. The China Securities Index Co.’s benchmark plunged 62 percent from the peak, to about 2,240 late last month, giving Wang and other new investors a brutal crash course in stock market volatility.

Wang, for one, insists he is staying in the market for the long haul, believing that the fundamentals of China’s economy remain strong. "I plan to invest in both stocks and funds, even as the market declines, because I believe they’ll come back roaring like a lion down the road."

The country’s fund managers, confronted with the first major bear market since the industry took off in earnest earlier this decade, are hoping that other Chinese investors will show the same resilience.

Asset managers are having to adjust their strategies rapidly to avoid being whipsawed by the market’s dramatic swings. Whereas a year ago they were scrambling to keep up with a torrent of inflows as the country’s growing middle class moved its money into stocks and mutual funds at breakneck speed, managers today are simply trying to retain assets and hang on to their investors.

At Bosera Fund Management Co., executives have been offering seminars and advising investors of the need to take a long-term approach. "Investor education is critical in the months ahead to sustain our growth in the longer term," says Li Quan, the firm’s executive vice president, who is head of marketing and sales. "We tell them we have no control over the short-term market but that we expect the market to grow in the long term."

Bosera showed stronger growth than most in the bull market, more than quadrupling its assets under management during 2007, to an impressive $35.3 billion at the end of the year; that total puts Bosera in second place in Institutional Investor ’s exclusive ranking of China’s 20 biggest fund managers, up three places from a year earlier. Now Li is working feverishly to hold on to those gains. "We believe we can avoid large-scale withdrawals this year," he says. "Our goal is to keep our investors with us for the long term so they will grow with us." China Asset Management Co. tops II ’s China 20 ranking, rising two spots from a year earlier after more than tripling its assets, to $35.7 billion at the end of 2007. Harvest Fund Management Co. falls two places to third, notwithstanding a 148 percent jump in assets, to $34.5 billion. Rounding out the top five are China Southern Fund Management Co. — which slips from No. 2 to No. 4, even though assets grew 153 percent, to $31.4 billion — and E Fund Management Co., which falls one place to fifth after nearly tripling its assets under management, to $26.8 billion. (The yuan’s appreciation against the dollar was a factor in the gains, but a minor one compared with the triple-digit growth experienced by the top five firms.) Many analysts believe the sell-off in Chinese equities has further to run. "With economic growth slowing, bad news on the earnings front from automakers, property developers and independent power producers is triggering a further downward rerating of stocks," wrote Jing Ulrich, head of China equities at JPMorgan Securities, in an August report.

Yet amid the downturn there are some positive signs for fund managers. Although the CSI index fell nearly 48 percent during the first half of 2008, China’s fund management industry saw only a 40 percent decline in assets, to 2.1 trillion yuan at the end of June, according to a July report from Z-Ben Advisors, a Shanghai-based asset management consulting firm. The figures suggest that most of the drop in assets reflects lower valuations rather than investor withdrawals.

Asset totals drew support from government measures aimed at shoring up the market, according to Peter Alexander, founder and principal of Z-Ben — namely, the China Securities Regulatory Commission approved licenses for 60 new funds in the first half of this year, up from 40 in all of 2007.

Another factor behind the industry’s success in asset retention is the absence of investment alternatives for the nation’s 112 million stock investors. "China, unlike the U.S. or Europe, doesn’t have a mature finance industry," says Hu Biliang, a senior economist with the Chinese Academy of Social Sciences in Beijing, a government think tank that advises the country’s top policymakers. "We don’t have a history of wealth management and are only learning now." When investors aren’t putting their money into the stock market, they are investing it in real estate or leaving it in the bank. China’s real estate market, which has doubled in value over the past five years, is on the verge of a correction, say analysts, including Shanghai-based independent economist Andy Xie, former chief economist for Morgan Stanley in Asia.

Notwithstanding those supporting factors, a cooling off of the Chinese economy has dampened investor sentiment. The global slowdown has curbed the growth of Chinese exports, and the People’s Bank of China tightened credit several times earlier this year in a bid to slow inflation, which hit an 11-year high of 8.7 percent in February. Growth slowed to an annualized rate of 10.1 percent in the second quarter, from 10.6 percent in the first three months of the year and 11.9 percent for all of 2007, according to the National Bureau of Statistics.

The Chinese government had become extremely nervous about the spreading contagion of the U.S. financial crisis by mid-September, shortly after the collapse of Lehman Brothers and the U.S. government bailout of insurer American International Group. Within days of the news, Chinese officials eliminated stamp duties for buyers of stocks to support the slumping market, which already is the worst performing in the world this year. China Investment Corp., the nation’s $200 billion sovereign wealth fund, announced that it was buying shares of Chinese state-controlled banks on the secondary market. Meanwhile, on September 15 the the central bank cut interest rates for the first time in six years, by 27 basis points, to 7.2 percent.

"The year 2008 is a year of tremendous challenge," Fang Yonghong, president and CEO of top-ranked China Asset Management, tells II . Bosera’s Li says his firm is looking for new ways to reach out to investors to drive home the importance of long-term investing. He will not say how much the firm devotes to its investor education efforts, such as a magazine and new seminars. In "For the past ten years, we had six years of bear markets, and yet we averaged a return of 28 percent a year, versus a market return of 14 percent per year," says Li, 45. "The key to success is, you stay with us."

Bosera has 9.58 million account holders and every quarter sends a glossy magazine to 800,000 clients who have invested 50,000 yuan or more. The publication contains articles and interviews with experts on wealth management and retirement planning. "When we hold our annual shareholder meeting, people often say, ‘We give you so much in management fees every year — where does all the money go?’ We say, ‘We spend tens of millions of yuan a year on just the magazine.’"

Chinese fund managers are getting an education as well, thanks to a few foreign investment banks keen to break into the market. BNP Paribas Securities, a subsidiary of the Paris-based bank, is holding free seminars for Chinese fund managers that last up to five days, sometimes flying dozens at a time to Hong Kong. The seminars cover the latest techniques for applying hedging instruments to minimize market volatility, says Joseph Yeh, head of Asia sales and products for BNP Paribas Securities Asia. China does not allow the shorting of equities, but the authorities are considering introducing futures on the CSI 300 index. "It’s an investment for BNP Paribas," Yeh says of the seminars. "China has underperformed the global market quite a bit, but we can show them how to hedge the market with derivative instruments. Though shorting equities isn’t allowed, we believe it will be legalized in the future. We do see this effort having a payoff down the road."

Investor education is just one of the strategies firms are adopting. Shanghai’s Hua An Fund Management Co. is spending "millions of dollars" setting up a customer relations management system to improve its customer service, says Shao Jiejun, executive vice president of the firm. "Aftersale client servicing is our top priority in 2008," he says. "In addition, rigorous risk management is important."

China’s fund managers are also pushing for more accountability, transparency and improved corporate governance at China’s listed companies, says Zhang Jianjun, an assistant professor of business strategy at Peking University’s Guanghua School of Management. "All entrepreneurs want to take their companies public, and being publicly listed means you have to open your accounting books to the investment public, especially to fund managers," he notes.

Wang, the Beijing-based investor, is keeping faith with the industry’s efforts and plans to maintain a portion of his portfolio in mutual funds over the long term. "They are, after all, professionals who spend their entire day analyzing companies," he says. "China’s stock markets will hit bottom sooner or later, and I have every confidence that my investments, including those in funds, will bounce right back to give me huge dividends."

Chinese fund managers are hoping his optimism is contagious.