SHANGHAI, July 23 (Reuters) – Smaller stock mutual funds in China of lesser known firms such as Huashang and Soochow are handily outperforming bigger rivals from leaders such as E Fund and Bosera this year, drawing investors and setting the stage for market share gains in the $295 billion industry.
As the Chinese stock market has slid with Beijing’s monetary tightening, the smaller funds have proved nimbler, cutting their equity holdings in favour of cash and switching to small-cap stocks or more defensive sectors including consumer goods and pharma.
Seven of China’s 10 best-performing stock funds are now run by firms with less than a 1 percent market share, including Morgan Stanley Huaxin, Morgan Stanley’s (MS.N) China fund venture, and Citic-Prudential, partly owned by UK’s Prudential (PRU.L).
They beat bigger funds such as the $1.6 billion Bosera Select Equity Fund, which is down nearly 18 percent.
“It’s easier for a small boat to change direction than it is for a gigantic ship,” said Wu Xianxin, analyst at Haitong Securities Co.
“For a big fund which manages more than 10 billion yuan, it would be much harder to buy into small-cap stocks or cut equity holdings quickly.”
Investors have started flocking to the smaller funds.
Huashang Fund Management Co, based in Beijing, increased assets under management (AUM) by 40 percent in the first half to $2.8 billion, boosting market share to 0.9 percent from 0.5 percent, according to fund consultancy Z-Ben Advisors.
Soochow Asset Management Co. increased market share to 0.4 percent from 0.3 percent while Morgan Stanley Huaxin nearly tripled its AUM and boosted market share to 0.5 percent.
That growth came even as China’s mutual fund industry saw a more than 20 percent slump in AUM in the first half to 2.1 trillion yuan, hurt by a stock market that tumbled 27 percent to be the second-worst performer in the world after Greece.
By comparison, the SME Composite Index .SZSME, which tracks China’s small- and medium-sized enterprises, lost 10 percent, while an index tracking Shanghai-listed consumer stocks, the Shanghai Composite Consumer Index, dropped 16 percent.
China’s benchmark Shanghai Composite Index .SSEC has recovered some of the lost ground in July, rising 7.3 percent, but is still down 21.5 percent so far in 2010.
The $396 million Soochow Value Growth Double Dynamic Fund, the second-best performing stock fund this year, slashed its equity exposure from 82 percent to about 60 percent during the second quarter, and boosted its cash holdings.
The fund also bought more consumer-related stocks such as Anhui Gujing Distillery Co (000596.SZ) and appliance maker Zhejiang Supor Co (002032.SZ), to benefit from China’s transformation away from an export-led economy.
Gujing Distillery, which makes traditional Chinese spirits, gained 24 percent in the first half, while Supor rose 21 percent.
“We effectively avoided systemic risks,” its manager Wang Jiong said. The fund is up 1.3 percent so far this year.
“Unlike many others in the market, I’m not a trend investor. I only buy into companies which can leverage strong brands and core competitiveness to generate long-term profit,” Wang added.
The $1 billion Huashang Prosperous Epoch Growth Fund, which doubled its assets in the second quarter, is the best performer so far in 2010 with a 2 percent return. The $618 million Morgan Stanley Huaxin Leading Advantage Fund was the third best.
China’s more than 270 equity funds posted an average 18.2 percent loss in net assets during the first half, compared with a 2.2 percent rise for pure bond funds and a 0.8 percent rise in money market funds, according to Haitong Securities.
China’s equity funds slashed holdings of banking stocks such as China Merchants Bank (600036.SS) and Minsheng Banking Corp (600016.SS) during the period, but increased exposure to consumer stocks including pharmaceuticals, food and beverage producers and garment makers, their quarterly reports showed.
“Winners in the first half were those that quickly shifted to consumer-related and other defensive stocks, as well as small-cap or second-board stocks,” said Huang Ruiqing, a fund manager at Changsheng Fund Management Co.
Some analysts, however, doubted whether the strong performance by some of the smaller funds would be sustainable.
“Whether these small funds can continue to deliver good performance remains to be seen,” said Mark Zeng, analyst at Shanghai-based fund consultancy Howbuy, noting that the Soochow Value Growth fund was near the bottom of the rankings in 2009. ($1=6.77 Yuan) (Editing by Muralikumar Anantharaman)