SHANGHAI Overseas investors betting on China-traded stocks have generally fared worse than local Chinese players over the past five years, according to Thomson Reuters data, underscoring the challenges foreigners face in a market that some say resembles a casino.
The revelation comes at a time when Beijing is stepping up efforts to lure foreign investors, handing out billions of dollars in new investment quotas over the past few months, to add depth and stability to its capital market.
The 24 offshore funds that invest solely in China's mainland-listed A shares, and tracked by Thomson Reuters Lipper, have lost 61 percent on average since November 2007, compared with a 40 percent decline for their Chinese peers. China's key stock indices have fallen more than 60 percent in the period.
The Nikko AM China A Stock Fund, managed by Nikko Asset Management Co, is the worst performer, losing 72 percent.
Performance by those China-dedicated funds may not tell the entire story - most offshore China funds do not make disclosures publicly - but the data still reflects overseas investors' frustrations under the Qualified Foreign Institutional Investor (QFII) scheme, which Beijing launched a decade ago to channel overseas money into China's capital markets.
"Stock-picking in China is very difficult. Not many executives at listed companies are good guys, so you need to be very careful," said Charlie Chen, founder and executive director of Shanghai-based asset manager MegaTrust Investment.
"You need to do a lot of due diligence, not just company visits ... and you need to talk face-to-face with company executives on a regular basis and read their minds."
GRAPHIC: Comparison of fund performances in China
Investor confidence has been badly dented in China by a series of corporate accounting scandals over the past decade, including the disclosure this year by regulators that Shenzhen-listed Foshan Electrical and Lighting Co had hidden transactions with affiliated firms over the past three years.
Howhow Zhang, head of research at fund consultancy Z-Ben Advisors, said foreign fund managers had failed to make sufficient investment in research in China, limiting their ability to do first-hand, in-depth analysis.
In contrast, local mutual houses have armies of investment analysts paying frequent visits to firms and doing grassroots research - such as counting trucks at factory gates.
This is the kind of research that is well suited to smaller companies - and it has put local players at an advantage over foreign rivals: in the past five years, small and medium-caps far outperformed blue chips, the main targets for foreign funds.
The CSI 300 Index, a key index of top Chinese companies tumbled 60 percent over the past five years, while the SME Composite Index, which tracks small and medium-sized enterprises listed in Shenzhen, lost just 9 percent.
"The quota for China investment is small, so it doesn't make sense for foreign funds to allocate a lot of resources to the China market," Zhang said.
China typically grants $100 million-$200 million in quotas to a foreign institution at a time, and caps the combined quota for a single QFII at $1 billion.
Beijing has been aggressively expanding the QFII scheme, having lifted the quota target for the overall QFII scheme by $50 billion to $80 billion in April. In October, it handed out a record $2.8 billion in new individual quotas.
Still, combined foreign investment in China's stock market accounts for only 1 percent of total market capitalization.
Foreign funds also suffer from investment restrictions and regulatory ambiguity. They cannot yet invest in China's highly liquid inter-bank bond market to diversify their portfolio or buy index futures to hedge risks. They also need to set aside provisions for possible taxation by Beijing on QFIIs' capital gains -- something that does not apply to local players.
"The limitation to the scope of products QFIIs can play currently is not conducive to the development of the (QFII) scheme," said Nicole Yuen, head of Greater China Equities at Credit Suisse.
GREATER CHINA FUNDS
Of the 24 pure-China offshore funds, the Eastspring China Dragon A Share Equity UH Class C fund suffered the least in the past five years, losing 41 percent, according to Lipper. It was followed by Schroder China Equity Fund, which lost 43 percent.
Among the worst performers are Shenyin Wanguo-Aizawa China A-Share Fund No. 3 and Morgan Stanley China A share Fund Inc, which lost 71 percent and 63 percent respectively.
The results do not take into account currency factors.
The performance of Greater China equity funds, which invest in both mainland and overseas-listed Chinese stocks, has been equally dismal.
Only 32 percent of such funds have beaten the benchmark MSCI China .MSCICN index so far this year, while just 58 percent of them have outperformed the broad market during the past five years, according to Lipper.
"Don't touch China stocks," U.S.-based hedge fund manager Daniel McCovey said, citing a series of accounting scandals at overseas-listed Chinese firms last year.
The tricky business of buying Chinese stocks has also tarnished celebrity fund managers such as Anthony Bolton, whose Fidelity China Special Situation Fund has tumbled nearly 30 percent in unit price since its inception in April 2010.
The MSCI China index fell 11.6 percent over the same period.
The pain foreign investors are feeling, however, has created business opportunities for Chinese asset managers.
Some of China's biggest fund houses, including China Asset Management Co and Harvest Fund Management Co, have travelled overseas in recent months to meet foreign investors, hoping to convince them that they need local advice to succeed in China.
"There are many services we can offer, from presenting research reports, making model portfolios, to becoming an asset manager," said Chen of MegaTrust Investment.
"You cannot just copy the Western approach in China's sinister stock market." (Additional reporting by Nishant Kumar in HONG KONG; Editing by Mark Bendeich)