The average return of funds managed by overseas institutions trading in yuan-denominated shares slumped 7.79 percent last month as the key stock index fell 9.7 percent, a report said.

The fall was more than a 5.27 percent average drop posted by domestic equity funds, according to Lipper & Co.

In the first five months of this year, the average return declined 20.87 percent year on year for funds under the Qualified Foreign Institutional Investor scheme, faster than a 13.75 percent decrease in domestic equity funds.

"China's stock market has suffered a bearish time since the beginning of this year on speculation of tighter macro-economy policies and the European crisis," said Xav Feng, research head of Lipper China. "But undervalued stocks are expected to attract institutional investors in the later half of this year, which would put an end to the bearish run."

The benchmark Shanghai Composite Index slumped 9.7 percent last month and 20.9 percent in the first five months of this year.

The average return of funds under the Qualified Domestic Institutional Investor scheme, which allows domestic firms to invest in overseas stock markets, declined 6.44 percent in May and 9.34 percent in the first five months, according to Lipper.