Not one open-ended mutual fund in China has been closed in the 15-year history of retail funds in the Asian country, showing firms spend heavily to keep unpopular “zombie” funds alive, according to Cerulli Associates, the research house.

Not one open-ended mutual fund in China has been closed in the 15-year
history of retail funds in the Asian country, showing firms spend heavily to
keep unpopular “zombie” funds alive, according to Cerulli Associates, the
research house.

With a heavy reliance on a retail client base and local bank
distribution networks, there is a proliferation of funds with small asset sizes
in China, the organisation said; the large number – 1,372 at the end of
September – explains why the average size of funds has fallen to RMB2.0 billion
($329 million) from RMB3.7 billion at the end of 2010. Over the same period,
total assets under management in the funds have risen by only 13.8 per cent.

"Typically, zombie funds have consistently
underperformed, had once taken the spotlight but saw low demand afterward, or
were launched by lower-tier fund houses," said Evonne Gan, an analyst at
Cerulli Associates.

In China,
gaining huge assets during a market surge does not mean that assets can be
retained. "In as short a period as six months, all gains can be erased and
these funds lie virtually abandoned on the periphery of the mutual fund space,
unwelcomed by both investors and distributors," Ken Yap, head of
Asia-Pacific research at Cerulli, said in the same report.

The proportion of zombie funds jumped significantly from
end-2012 to the third quarter of 2013. Qualified Domestic Institutional
Investor funds are prominent among them. Half of the 74 QDII funds in the
market have less than RMB100 million in assets and almost a quarter of them are
below RMB50 million, but remain alive.