A dramatic drop in net asset value of all four qualified domestic institutional investor (QDII) funds from local financial institutions has caused a dilemma for mainland investors who want to broaden their portfolios.

 

Mutual fund research firm Morningstar notes in its latest report that there were two main factors in the underperformance of QDII funds.

 

Significant is the correction trend that began at the beginning of November in major stock markets impacted by the subprime credit crisis, which directly accounted for the drop in value of QDII funds.

 

As well, the funds have been focused on investing in Hong Kong-listed stocks. After the Chinese government suspended a program for Chinese residents to directly invest in Hong Kong stocks, investor enthusiasm was dampened.

 

"Also when many QDII funds entered the Hong Kong market, the prices of many stocks in the market were already very high, and that also affected QDII performance," Morningstar says.

 

"QDII funds are still in a process of building their portfolios. The net asset value may be influenced by many factors such as trading fees," says Xie Liwen, research director of Yinhua Fund Management Co Ltd, who is also the key person responsible for the company's QDII program.

 

"So it is too early to judge a fund house and its asset manager's performance in such a short time."

 

Xie says that QDII funds are still a good choice as they allow domestic investors to share in global investment opportunities and diversify risks in a wider portfolio.

 

"As Chinese investors are more experienced in investing in Hong Kong compared to other markets, a large portion of their portfolio has been invested in Hong Kong. But QDII funds in the long run should not be limited to this market," he says.

 

Training local fund managers to have abundant global investment experience is a priority to many asset managers.

 

According to Xie, part of Yinhua's QDII investment team are local employees and some are hired from overseas for their investment talent.

 

Investment professionals from overseas provide consultancy to local teams at many stages during the launch of QDII funds, including sales, investments, trade and transactions.

 

Some fund managers see the QDII scheme as not merely a product, but an experiment for local fund houses to develop international business.

 

"QDII opened a door for Chinese asset managers. We should take this opportunity to go outside and improve our capabilities," Xie says.

 

(China Daily December 3, 2007)