According to a report by Bloomberg, citing sources familiar with the matter, China is considering a significant overhaul of its $4.6 trillion mutual fund industry. The proposed reforms aim to encourage long-term investment by adjusting the compensation structure for fund managers. If implemented, the new rules would cut the pay of underperforming managers by as much as 50% if their funds fail to meet certain benchmarks.
The China Securities Regulatory Commission (CSRC) is reportedly behind the proposal, which is part of a broader effort to introduce a long-term evaluation mechanism for the industry. Under the plan, fund performance would carry significant weight in assessing the management effectiveness, with a minimum of 50% of the evaluation based on returns. Other factors, such as the size and ranking of the fund management company, would be given less emphasis. While the specifics of the plan are still under consideration and subject to change, the move reflects a growing concern over the inconsistent performance of many Chinese mutual funds.
Despite the rapid growth of China’s mutual fund industry, which has attracted global asset management giants like Fidelity International Ltd., many funds have struggled to deliver strong returns. This has eroded investor confidence and hindered fundraising efforts. Furthermore, the high compensation packages awarded to some prominent fund managers, even when their funds suffer significant losses during market downturns, have sparked outrage among investors. The proposed reforms seek to address these issues by introducing a more performance-based compensation system.
The draft measures outline a framework for evaluating fund managers based on their long-term performance, with a focus on periods of at least three years. The weight of long-term performance in the evaluation would be at least 80%, with provisions for deferred payment or even clawbacks of compensation as needed. Additional factors, such as net asset value (NAV) growth, profitability, and the proportion of profitable investors, would also be taken into account. By introducing these changes, Chinese regulators aim to promote a more sustainable and investor-centric mutual fund industry.
Key aspects of the proposed reforms
- Reduced compensation for underperforming fund managers by up to 50%
- Increased emphasis on long-term performance in evaluations, with a minimum weight of 50%
- Introduction of a long-term evaluation mechanism, focusing on periods of at least three years
- Consideration of additional factors, such as NAV growth, profitability, and investor returns
While the exact timeline for implementing these reforms is still uncertain, the CSRC’s efforts to revamp the mutual fund industry are seen as a step in the right direction. By prioritizing long-term performance and investor returns, Chinese regulators hope to restore confidence in the industry and foster a more stable and sustainable investment environment.