Asset managers slap health warnings on China funds in risk rethink

Sun Sep 27, 2015 5:23pm EDT
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By Michelle Price

HONG KONG (Reuters) - Fund managers are adding new warnings to China investment products in a bid to reduce their legal liability if regulators repeat the heavy-handed intervention in financial markets that rattled investors globally.

Hedge funds, asset managers and exchange traded fund (ETF) providers are scrambling to add the new disclosures to legal fund documents following watershed government actions in recent months that are now forcing managers to rethink China investment risk.

The legal measures illustrate the degree to which China's market intervention is set to have a tangible long-term impact on investor confidence. Rather than shrugging off the actions of the government, fund managers see the intervention as a material risk going forward, lawyers and fund managers said.

"The government's actions have shown their lack of confidence in the market mechanism and its ability to achieve stable levels reasonably swiftly," said Sanjiv Shah, chief investment officer at London-based Sun Global Investments, which manages money for high net worth clients.

"This further damages the confidence of existing and prospective investors."

The disclosures on trading halts, liquidity freezes, short-selling bans, and other regulatory restrictions, could see retail investors, pension funds, and insurers pull more money out of these products in coming months.

Exchange filings show BlackRock Inc (BLK.N: Quote), the world's biggest asset manager, updated the legal documents for its $5.1 billion iShares FTSE A50 China Index ETF in August and September. The updates added swathes of new language on the potential risks and costs of a "market disruption event" such as share suspensions or other actions that freeze market liquidity and so could leave investors out of pocket.

The latest prospectus on the ETF, which tracks the 50 biggest companies traded in Shanghai and Shenzhen, makes 24 references to "volatility", compared with 16 in the 2014 prospectus of the same fund.   Continued...

An investor looks at an electronic board showing stock information at a brokerage house in Beijing, China, September 8, 2015.  REUTERS/Kim Kyung-Hoon