An Overview of China's Fund Industry(4)

　　5. Portfolio Investment

　　China's fund industry's firstpuorgof fund managers was top traders from stock brokerage houses. Nowadays, when it comes to portfolio management, the due diligence demonstrated by the Chinese fund managers are no less than their Western counter parts in terms of taking calculated risk, and managing uncertainties during the course of securities investment. So far, the year 2005 presented plenty of uncertainties to the Chinese fund managers.

　　5.1 Reading the Macro Economy

　　All of the 10 oldest fund companies have their research and investment departments. On top of the in-house reports, fund managers also receive more macro economic review; industry and individual stock reports from securities houses. The deal is arranged like such: securities houses provided macro-economy; industry and individual stock reports to the fund companies in exchange for stock trades placed through them, since fund companies can not place trade orders direct to stock exchanges.

　　Started from 2004, China's central government took on the heated economy with a targeted "cooling" measures toward real estate and steel industries; bank credit in general has tightened; import has decreased significantly; corporate earnings in turn were squeezed. In response, fund managers took money out of the "second tier blue chip companies" when they already provided decent price appreciation. The cash proceeds immediately wentotninon-cyclical industries such as consumer; medial and pharmaceutical, service, insurance and public utility industries as a defensive move. Also, the depressed real estate sector released some moneyotnitravel; apparel; restaurant and auto industries.

　　5.2 Stock Picking

　　When China's fund industry was established back in 1997, "value investment" as a concept was new to most of the Chinese fund managers. After JV fund companies demonstrated their value driven stock picking performance, the "value investment" concept took the root in the industry. Then, after the market went downhill for four years, many started to question if there is any value at all in China's equity market. The arch representative of the view is the managing director of UBS China Mr. Huaqiao Zhang. He believed that there are only 5 stocks in China's A share market that have investment value.

　　Zhang's rivalry is Mr. Zhaoxiong Zeng, the Director of Investment at China Merchants Funds. According to Zeng, there are 109 stocks achieved price appreciation during 2001-05, while during the same time frame the Shanghai Stock Composite Index tanked 48%. Among them, Aerospace Information (600271); Yi hua Timber (600978); Yili Group(600887); Fengfan Stock (600482) and 47 other stocks realized under 20% growth.

　　Guangdong Greatoo Molds(002031); Wuhan Iron and Steel(600005); Jingyuan Electronics(002049); Yunnan Baiyao(000538)and 31 other stocks achieved between 20%-50% growth. Nanrui Tech(600406); Shenzhen Yantian Port Holdings(000088); China International Marine Containers (000039); Shanghai First Provisions Company(600616); Sinopec Yangzi Petrochemical(000866)and 8 other stocks accomplished between 50%-100% growth. Shanghai Urban Acro-Business(600837); Kweichou Moutai(600519); Guizhou Space Appliance(002025); Dongfang Electric(600786) and 5 other stocks realized over 100% growth.

　　Also, there are 39 stocks have been going up since their IPO. Dashang Group(600694); Dongfang Electric(600786); Zhejiang China Commodities City Group(600415)and 7 other stocks achieved annual growth under 10%. Qinghai Salt Lake Potash(000792); ZTE(000063); OCT Real Estate(000069)and other 16 stocks realized annual share price appreciation between 10%-20%. Nanrui Tech(600406); Financial Street Holdings (000402); Yantai Wanhua(600309)and 8 other stocks realized above 20% annual growth.

　　As mentioned in the early part of the paper, the state-owned shares reform turned many institutional investors' valuation system topsy-turvy. Instead of treating the reform as an opportunity to make long-term portfolio adjustment, some of the fund managers took it as a short-term trading game. What's hurting the sentiment of the market is that when one fund manager starts to liquidate some of his positions, his counter parts at other fund shops will follow suits. On Mr. Zeng's watch list, the average P/E of 276 companies has decreased from 16.6 at the end of 2004 to 12.8 at the beginning of the fourth quarter of 2005.

　　5.3 Risk Management

　　In most of the Chinese fund companies daily operation is delegated through two committees, one being the Investment Committee and the other being the Risk Management Committee. Inside the Fortis Haitong Investment Management, a Business Management Committee is in place on top of the other two committees. To guide the administration of three committees, Fortis Haitong implanted three systems: risk control system; compliance system and monitor system. This way, a full-fledged risk control is in place during the whole process of asset allocation, securities selection and trading. Systems of similar nature and set up are also in place at the top 10 Chinese fund management houses. However, will these systems save fund companies from mistakes such as over investment or under investment? No! Fortis Haitong's CEO, Mr. Tian Rencan admitted they had received letters from investors complaining fund manager "under invested" when market reached a short-term low.

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