From: Financial Times By Andrew Wood in Hong Kong

A pioneering offshore fund that gives Chinese retail investors exposure to global markets has delivered a subdued performance in its first half-yearly results.

The Hua’an International Balanced Fund was the first product offered under China’s limited qualified domestic institutional investor (QDII) scheme.

Hua’an Fund Management of Shanghai launched it in October last year, with Lehman Brothers as foreign advisers. With five further QDII funds expected this year, the Hua’an fund is being closely watched for clues as to how the offshore market might develop. min

A wave of up to $1,300bn of private savings could flow out of China into global bond and equity markets as individual Chinese gain more freedom to invest offshore, according to Capital Economics

Individuals can invest easily on mainland China’s stock markets but it remains difficult for them to diversify abroad, other than by using a pilot scheme to buy Hong Kong shares.

Performance of the Hua’an fund has been “scant at best,” says Z-Ben Advisors, a Shanghai research firm, in its analysis of the fund’s first half-yearly report.

“Leaving aside the issue of renminbi appreciation, the fund has generated a return of just 3.8 per cent – in dollar terms – from inception to mid-year and down to just 1.2 per cent at the end of July.”

In comparison, the Shanghai stock market rose by 160 per cent in local currency terms from October to July and the Shenzhen market was up 190 per cent. However, the FTSE World Index has risen by just 3.4 per cent this year.

Z-Ben warns that the Hua’an fund has an unusual structure and may not give a clear idea of how other QDII funds may perform.

“China’s drive into international markets is an evolutionary process and there will be bumps along they way,” Z-Ben says. “Retail demand will materialise. So too will products be developed that best meet that demand.”

The Hua’an fund was developed before regulators published details of rules for such products. “The product was actually created as a structured note,” Z-Ben says.

“Furthermore, it should be viewed more as a fund-of-funds as most of the assets are invested into four separate funds with at least three of those managed by Lehman Brothers.”

Lehman Brothers said last night that it was unable to comment. The Shanghai stockmarket on Wednesday fell by 1.6 per cent to 5109.42.

Copyright Fund China 2008.

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