China plans 50% pay cuts for fund managers missing performance targets

By Bloomberg News

 

China is considering slashing pay of fund managers who underperform their benchmarks as part of a broad overhaul of the nation’s 33 trillion yuan ($4.6 trillion) mutual fund industry aimed at boosting long-term investments, according to people familiar with the matter. 

The China Securities Regulatory Commission is proposing a 50 per cent pay reduction for fund managers if products overseen by them record a loss or return 10 per cent less than their performance benchmarks, said the people, asking not to be identified discussing a private matter. Such pay cuts are part of a long-term assessment mechanism the regulator is trying to establish, the people said, adding it was not clear what time frame it would be applied over. 

 

Under the draft plan, fund returns will account for at least half of the weighting in senior management’s evaluation, while other metrics such as the firms’ size and ranking will become less important, the people said. The proposal has yet to be finalized and may change, they added. 

 

The CSRC didn’t respond to a request for comment.

 

The sweeping measures come as policymakers seek to attract more long-term capital into the nation’s stock market amid slowing economic growth and an escalating trade war with the US. China’s benchmark CSI 300 Index has gained about 1.7 per cent this year. 

 

The country’s top markets regulator Wu Qing hinted in January that reforms were coming when he said publicly that revamping the mutual fund sector’s incentive mechanisms to better align with investors’ interests could help increase equities holdings of funds by 10 per cent annually over the next three years. Local media outlet Jiemian also earlier reported that China was set to launch reforms of the mutual fund sector.

 

While China’s mutual fund industry continued to grow and attract global asset managers like Fidelity International Ltd. in the past few years, many products underperformed, hurting client trust and hampering fund raisings. Investors have also grown increasingly frustrated with star managers who kept their high salaries despite their funds making hefty losses during periods of market declines. 

 

The draft rules apply to all fund managers in the country, including joint ventures with foreign investors. 

 

Under the draft measures, fund managers’ evaluation should be at least 80 per cent based on three-year performance or longer, the people said. Their remuneration could be delayed or even clawed back when needed, they said. Other indicators such as their products’ net value growth, profitability and the proportion of money-making investors will be added to their metrics.

 

Stock Products  

Among further moves to encourage more equity products, the watchdog is also planning to ensure that active stock and index funds based on mature broad gauges can complete registration within 10 days of application, the people added. Stock funds with lower fees, longer-term investment horizons and regular dividends will receive more support. 

 

Active equity funds averaged a 4 per cent return last year, compared with a 15 per cent gain in the CSI 300 Index, according to a CSC Financial Co. report. Meantime, exchange-traded funds witnessed a surge in assets as disappointed investors chased passive alternatives. 

 

Officials in January unveiled a package of measures to guide more long-term capital into the stock market, including pushing state-owned insurers to invest 30 per cent of new policy premiums into mainland stocks starting from 2025.