GF International's new A-share ETF eyes MSCI inclusion

Hong Kong-based fund house GF International Investment Management will list its first China A-share ETF in Hong Kong this week.

The firm is looking to secure a niche in the market ahead of A shares’ potential inclusion into the MSCI global emerging market index.

The overseas arm of Guangzhou-based GF Fund Management sees its passive buildout as a key part of its development into a well-rounded asset manager.

Azra Lau, the firm’s director and head of exchange-traded funds, said the Hong Kong ETF launch was part of the parent company’s long-term plan to provide different vehicles for investor diversification. Presently, GF Fund has listed 10 ETFs in mainland China, while GF International has teamed up with US-based Global X Funds to launch a bond ETF in New York.

The new fund, to be launched this Wednesday (July 29) will be managed by two Hong Kong-based portfolio managers - the firm’s Hong Kong head Nathan Lin, and another manager who is moving from the Guangzhou office.

GF will physically replicate the MSCI China A International index, providing exposure to about 369 onshore A-share companies via the firm’s renminbi qualified foreign institutional investor (RQFII) quotas. It will be the first ETF in Asia to track the benchmark, a new index launched by MSCI in June last year to prepare for A-share inclusion in its global EM index.

The index provider launched the MSCI China A index - another benchmark commonly used by ETF providers - in 2005. It provides exposure to about 577 mainland Chinese stocks.

Lau noted that the new index had been designed for overseas investors with the potential inclusion of A shares into the MSCI EM or ACWI family, based on the index provider’s methodology. But the older index is a standalone benchmark which could not fit into the MSCI global benchmark in the future.

“This index’s representation and importance will rise in global markets,” Lau said.

Thanks to the expansion of the RQFII scheme and foreign investors’ appetite for Chinese assets, China equities products have dominated Hong Kong’s ETF space. In all, 67 out of 98 listed ETFs in Hong Kong tracked China equities (both A and H shares) at the end of 2014, with 30 having launched after 2012, according to London-based research house ETFGI.

Observers have been concerned that the market has been saturated with homogenous products, while providers said new ETFs needed to find a niche.

Lau is optimistic about her product’s niche. “You can only enjoy zero competition if you are the first player in one market, and it would be easier to develop your product; otherwise, you must need to find a niche to develop a long-term sustainable business model,” she said. “The A-share market is still young - there is huge space for development.”