Why Can't Public Mutual MOMs Thrive Despite Two Consecutive Liquidations?

The market before the National Day holiday was immersed in the frenzy of rising prices. Few paid attention to the fact that a public mutual fund MOM was liquidated, marking the second one to be liquidated this year. This means that out of the first batch of five pilot public mutual fund MOMs, only three remain.

These products were all established in 2021. Whenever innovative products are launched, they come with certain labels to better showcase their features to investors. Public mutual fund MOMs were introduced with the "three more" title, which stands for diversified asset allocation, diversified investment strategies, and diversified investment managers.

More than three years have passed, and domestic public mutual fund MOMs have not flourished as expected; instead, they have fallen into a situation of continuous scale reduction and liquidation.

Why can't this type of product take off?

The industry generally does not find the current state of development of public mutual fund MOMs surprising. Some people tactfully say, "The fact that there is only a first batch of pilots and no second batch indicates the problem"; others bluntly state, "This business model simply doesn't work."

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Unideal scale and performance

On September 24, Huaxia Fund released the "Notice of Termination of Fund Contract and Liquidation of Fund Property for Huaxia Borui One-Year Hold (MOM)." This is an initiatory MOM established on September 23, 2020, with an initial scale of only 13.683 million yuan, of which 10 million yuan was funded by Huaxia Fund itself. According to the contract terms of this product, if the net asset value of the fund is below 200 million yuan on the corresponding date three years after the effective date of the fund contract, the fund contract will be automatically terminated.

The China Merchants Hui Run One-Year Fixed Open (MOM), which announced liquidation on August 7, was also due to the same reason. Both of these funds are initiatory products with relatively small issuance scales. The initial scale of China Merchants Hui Run One-Year Fixed Open (MOM) was 75.6016 million yuan, and because it was established earlier than Huaxia Borui One-Year Hold (MOM), it triggered the liquidation clause earlier.The remaining three MOMs that are still in operation are also not in a promising situation. As of the end of the second quarter, the scale of CCB-Credit Wisdom Selection One-Year Hold (MOM) was 1.232 billion yuan, which has shrunk by half since its establishment. The other two - Chuangjin HeXin Qunli One-Year Fixed Open (MOM) and Penghua Selected Heroes One-Year Hold (MOM) - both have a scale of only over 100 million, and both have shrunk by more than 60% compared to their issuance scale.

The significant shrinkage in scale is partly due to share redemptions and partly due to poor performance. The first batch of public MOMs were unfortunately timed, all established at the peak of the last bull market or the beginning of the bear market, and did not demonstrate the "three more" advantages, with loss situations being no different from ordinary actively managed equity funds.

When China Merchants Huirun One-Year Fixed Open (MOM) was liquidated, the A and C shares respectively lost 33% and 34.2%; when Huaxia Borui One-Year Hold (MOM) was liquidated, the A and C shares respectively lost 22.24% and 23.17%.

Among the still-operating MOMs, as of the end of September, CCB-Credit Wisdom Selection One-Year Hold (MOM) has lost 24.51% since its establishment, and Penghua Selected Heroes One-Year Hold (MOM) has lost 17.1% since its establishment.

In comparison, Chuangjin HeXin Qunli One-Year Fixed Open (MOM) has the best performance, with the A and C shares losing 7.85% and 11.08% respectively since their establishment.

Business Model Dilemma

Compared to being unfortunately timed, a senior fund research expert believes that there are deeper reasons why public MOMs are not taking off. In his view, this business model is fundamentally unworkable.

The full name of MOM is Manager of Manager (Manager of Managers), and the operation model is that after the product raises funds, the capital of the mother fund is divided into several assets and handed over to different fund managers for investment advisory management.

"Managers refer to fund companies or fund managers?" Zhang Lin believes that this definition is not clear. Public MOMs only disclose which fund companies are investment advisors when disclosed externally, but the actual investment advisory services are provided by fund managers.

In other words, the individual contributions of fund managers cannot be displayed externally. In addition, due to regulatory provisions, the maximum number of products that each fund manager can manage is 10, and managing MOMs will occupy product slots. The income of fund managers is also linked to scale, and among the first batch of MOMs, only CCB-Credit Wisdom Selection One-Year Hold (MOM) had a small issuance scale.Additionally, investment advisors only provide investment advice and other services for specific asset units within the agreed scope of authority, with the actual transactions being executed by the fund company where the parent MOM is located. For the fund managers of the sub-MOMs, this model poses a risk of investment strategy leakage.

Based on these factors, MOMs lack appeal to fund managers with strong investment capabilities. "When MOMs are looking for investment advisors, they encounter an awkward situation: if you take a liking to a certain fund manager, they may not necessarily take a liking to you," said Zhang Lin.

In an ideal state, MOMs should be able to find the best group of fund managers in the market, achieve a strong alliance, and change suitable investment advisors based on changes in market style. However, the reality is that "there are very few choices."

According to information disclosed by 5 public MOMs in the past, although each product has appointed 2-4 fund companies as investment advisors, the overlap in the list is quite high. After more than three years of operation, only 9 fund companies have participated in this business, and these MOMs have never changed their list of investment advisors (fund companies).

Although the list of investment advisors has not changed, the proportion of funds allocated to sub-MOMs will be adjusted. New media also noticed that the parent MOM does not entrust all assets to investment advisors; a portion is managed by the parent MOM itself.

Looking at the data disclosed in the latest 4 quarterly reports, the highest self-management ratio is Penghua Fund, which has been maintained at over 50%; Cinda Australia Asia Fund has the highest participation, appearing in the investment advisor list of 4 public MOMs; the highest single investment advisor management ratio exceeded 50% - Chuangjin He Xin Qunli One Year Fixed Open (MOM) has 4 investment advisors, and in the second quarter of this year, 53.43% of the funds were allocated to Dacheng Fund.

A handful of investment advisor fees

From the perspective of company management, the driving force for the development of a business is whether it can make money and how much money it can make.

The initial management fee rate for public MOM products was 1.5%, which was reduced to 1.2% after the public fee reduction was implemented. According to an article published in 2019, the investment advisor fees for public MOMs were deducted from the management fees, but there was no clear division rule and specific ratio.

New media noticed that among the first batch of 5 public MOMs, except for Huaxia Borui One-Year Hold, all disclosed investment advisor fees in their annual reports.Looking at the annual reports from 2021 to 2023, the management fees of MOM are distributed among three parties. The largest share typically goes to the client maintenance fees of the sales organization, commonly known as "trailing commissions" or "trail commissions." Next is the management fee paid to the parent MOM, and the investment advisor receives the smallest share.

Taking the largest-scale product, CCB Zhihui Optimal Selection One-Year Hold (MOM), as an example, its employed investment advisors are GF Fund and Invesco Great Wall Fund. The trailing commission ratio for this product is between 41.78% and 41.83%; the management fee ratio for the parent MOM is between 35.2% and 39.34%; and the investment advisor fee ratio is between 18.88% and 22.97%.

In other words, each investment advisor can only receive an average of about 10% of the management fees.

The situation for Chuangjin Hengxin Qunli One-Year Fixed Open (MOM) is even more fragmented. This product has a small issuance scale, only 338 million yuan, and has appointed four fund companies as investment advisors, namely Dacheng Fund, Yongying Fund, Cinda AoYa Fund, and Huisheng Fund.

From 2021 to 2023, the investment advisor fee ratios for this MOM are 8.74%, 11.76%, and 13.72%, respectively, with corresponding amounts of 368,700 yuan, 445,200 yuan, and 343,800 yuan. Distributed among four investment advisors, the labor fees they can receive are very limited.

The situations of the other two MOMs are similar. Penghua Elite Group Heroes One-Year Hold (MOM) has employed Cinda AoYa Fund, Huatai-Pine Fund, and Huisheng Fund as three investment advisors. The investment advisor fee ratios for the past three years are 6.64%, 9.89%, and 13.07%, with corresponding amounts of 96,400 yuan, 440,700 yuan, and 337,100 yuan.

China Merchants Huishun One-Year Fixed Open (MOM) has employed Cinda AoYa Fund, Anxin Fund, and Huatai-Pine Fund as investment advisors. The investment advisor fee ratios for the past three years are 16.44%, 24.67%, and 31.03%, with corresponding amounts of 75,700 yuan, 234,700 yuan, and 223,200 yuan.

For investment advisors, public MOM seems to lack cost-effectiveness.