China Fund Surprises by Raising $1.8 Billion in a Day
Changsheng Fund Management, one of the original "old-10" fund houses that founded the Chinese fund management industry and a 33% joint venture with Singapore banking group DBS, has surprised the market by raising more than 10 billion yuan ($1.8 billion) for its latest fund offering in just one day.
Without disclosing the final amount raised, Changsheng says it is closing the fundraising exercise ahead of schedule. The fund did not offer any innovation or surprising investment theme. Just like most other funds, the fund allocates 60% or more of its assets in local A-shares, with the rest is held in domestic debt instruments, money market securities or cash.
The 10 billion-mark has not been touched since the heady days of QDII fund hype in late-2007. The last house to hit that mark was China International Fund Management, a fund JV between JPMorgan Asset Management and the Shanghai International Trust, a government-backed business affiliated with the Shanghai municipal government.
The fund was backed by just one bank distributor, the China Construction Bank, which has also nabbed the custodian agreement; and 69 securities houses authorized to deal in closed funds and listed open-ended funds (LOFs) offered in Shenzhen. UBS Securities and Essence Securities were two of these houses that had managed to be included in the deal last minute.
It is managed by Wang Ruiqing, a PhD graduate from Xiamen University. After completing his education in 2002, Wang started his career as an analyst with Rongtong Fund Management, a 40% JV owned by Japan's Nikko Asset Management.
From Rongtong, he briefly moved to Great Wall Fund Management where he was a financial engineer, and later, a money market fund manager. In 2005, he joined Changsheng, first running its money market fund, then its CSI 100 fund, as well as a segregated account for the National Social Security Fund.
This latest fund from Changsheng Fund Management has a split structure, with investors offered fund shares in two tranches: tranche A represents 40% of the investment and pays a guaranteed interest of 5.6% in the first three years, unless the fund NAV dips below 60% of its original value; tranche B represents 60% of the fund and is a riskier, leveraged tranche.
There are terms and clauses structured into the fund agreement as to how profits, and potentially loss, are shared. The guarantee element offered in tranche A is in fact provided by funds in tranche B. While investments held in tranche B are exposed to higher risks than A, net of all interest and expenses payable, B will receive all profits left accrued.
The investment is locked up in a closed-end structure for the first three years. At the end of the third year, the entire fund will be converted into a LOF, or a listed open fund, a peculiarity which combines characteristics of both an open-ended fund and a closed-ended ETF known only to China. The structure is especially popular in Shenzhen.
This means, after the conversion, investors can engage in offline subscription or redemption with the issuing house, Changsheng; as well as trade the fund shares, which will become listed on the Shenzhen Stock Exchange.
Shanghai-based research house Z-Ben Advisors believes the wild success of Changsheng's fundraising is because investors believe they are getting the fund shares at a discount, and can profit by trading these at a premium in the listed market.
Furthermore, it is the only leveraged fund offered in the market place. Leverage may seem like a bad idea elsewhere in the world, but Z-Ben believes there might be a valid argument for investors believing in applying leverage in China, considering the current market performance.
A similar product has been offered previously by UBS-SDIC, but at a much lesser profile. The Shenzhen house affiliated with UBS had been searching for a CIO for over a year - and the search continues.
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