Capital Group eyes China expansion, rejects MRF

Jun 13, 2016

The US firm will not use the Hong Kong-China mutual recognition of funds scheme but plans to wait for rules allowing direct access to mainland retail clients, says its Asia head.

Capital Group eyes China expansion, rejects MRF

US asset manager Capital Group feels the mutual recognition of funds (MRF) scheme is not the best way to access China and plans instead to set up an onshore presence and directly access the retail market, when regulators allow it.

The firm, with $1.4 trillion in assets under management, has decided not to participate in the cross-border MRF scheme, which launched on July 1 last year with an initial quota of Rmb600 billion ($97 billion). Nor does it plan to set up a wholly foreign-owned entity (WFOE), as rivals such as Aberdeen, Fidelity, Franklin Templeton and Schroders have done.

Thomas Quantrille, managing director for Asia Pacific at Capital Group, told AsianInvestor: “We were excited at first, but after deep soul-searching we realised it [MRF] was not the avenue we are interested in taking. We are not convinced that is the way to access China in the long term.”

Rejecting MRF is unusual at this point, with several other fund houses – such as Barings, Pictet and UBS – considering using it or already doing so or applying to do so.

But Quantrille said his firm would wait rather than jump early into China through MRF.

“We need to be patient,” he noted. “China is changing. There are larger things they are talking about, such as wealth accumulation, retirement needs driven by changing demographics, life expectancies and the need to plan for longevity risk. All of these will be great long-term opportunities, and we will access them the right way.”

The MRF scheme has several criteria that are deterring fund managers from participating, as highlighted in a survey last month by the Hong Kong Investment Funds Association. These include the requirements that 50% of assets in an MRF fund must be raised overseas and that funds must be domiciled in Hong Kong.

Capital Group already has a representative office in Beijing with 15 associates conducting macroeconomic research. While the firm is largely a retail player in the US, institutional clients provide the bulk of its $14 billion AUM in Asia. It only entered the retail business a few years ago in the region.

The company now has 15 relationship managers covering distribution in Asia, based in Hong Kong, Singapore, Sydney and Tokyo. It made a decision last year to put a greater focus on its regional retail business, as reported.

However, a key challenge in Asia is the short-term investment attitude of retail investors, said Quantrille. Distributors are partly to be blamed, as they encourage fund churning to boost sales commissions, he added.