Mainland Managers Capping Fund Sizes

Several fund management companies in China have been taking measures to limit the amount raised for new funds in order to deliver better performances that will otherwise be jeopardized if size is not under control.

GF Fund Management has recently set a new record in China’s eight-year old fund market as its GF Strategic Selection Fund raised 18.4 billion yuan in May.

The firm recently revealed that this record was not a result of aggressive targets set for the distributors. On the contrary, the firm took the unusual step of requesting its distributor, Industrial and Commercial Bank of China, and other brokerages to slow down the processing of subscription applications on the four days of the IPO when the subscription amount surpassed the 10 billion yuan mark.

The fund finally closed its IPO on the sixth day, much earlier than the usual one-month IPO period for typical fund launches. A GF official said that the firm wanted to limit the fund size to ensure better management of the new fund.

The explosive response has been a result of expectations from investors who learned that GF’s Small Cap Growth Fund, launched in February 2005, delivered a return of more than 70% since the beginning of this year. The same firm’s other three equity-biased funds generated returns of more than 35% last year.

The strong response to the firm’s launch has surprised officials. Its marketing and distribution team consist of just about 20 people, smaller than the 30-40-member teams in other bigger firms. The Small Cap Growth Fund raised only 2.3 billion yuan at the IPO stage.

A mutual fund in China cannot have more than 10% of its assets invested in shares issued by a single listed company. A listed company cannot have more than 10% of its total capital held by a single fund. These so-called “10% equity investment rules” will limit the growth potential of a large fund, even if it deploys the same strategy as when it was still small.

Having witnessed such am anomaly, the Guanghou based E Fund, has set an internal ceiling of seven billion yuan for the launch of its new E Fund Value Selections Fund.