AI 15: Rules and reforms put HK funds at crossroads
Hong Kong's mutual funds industry has come on in leaps and bounds over the past 20 years. Here Bruno Lee analyses its development, including the key introduction of the MPF pension system, and looks to its future.
The full version of this article can be read in the May 2015 edition of AsianInvestor magazine.
In the 1990s a mutual fund was a security, rather removed from the general public in Hong Kong. The investor base was small and the channel to gain access was limited.
Today, if you walk into a bank branch, funds are invariably a core part of the product menu. About 80% of fund sales are conducted through banks. Their dominant role can be attributed to both demand and supply factors.
Interest-rate liberalisation since early 2000 has led banks to look for other growth drivers, while the increasing affluence and sophistication of the local population created strong latent demand for wealth management services.
Banks’ extensive branch networks and perceived trustworthiness by the public enabled them to boost fund penetration.
Funds received a boost with the launch of the Mandatory Provident Fund Scheme in 2000. MPF has enhanced the general population’s understanding of and familiarity with funds, and awareness about ageing and longevity risks. While MPF has attracted much public debate, in particular in relation to fees and returns, the steady rise of voluntary contributions (from single digits on inception to about 25% of the total contributions in 2014) testifies to increasing trust in the system.
The implementation of full portability and the launch of default funds will spur employee engagement. They will leverage the MPF platform more extensively.
To enable investment managers to effectively develop products that can cater to different stages of a person’s lifecycle, the regulatory framework should be more flexible so that managers can capitalise on the emerging growth drivers.
A case in point is China’s A-share exchanges. They are still not on MPF’s list of recognised bourses. Structural issues have prevented them from being added, but this highlights the constraint of the current regulatory approach, which is predicated on an old economic order.
With retail funds, China-related investments already loom large on the product menu. With QFII, RQFII and Stock Connect, managers can help investors gain exposure to China’s markets. The pace of change will increase, with further expansion and relaxation of restrictions, such as mutual recognition.
Ultimately, MPF is about long-term investment. The framework should be forward-looking and enable managers to come up with solutions to help members better manage their retirement needs.
As the RMB evolves from a trade-settlement to an investment and reserve currency, Hong Kong will be well positioned to leverage on the trend. We have the infrastructure and investment management professionals to develop RMB-related services and products.
Hong Kong has always been one of the world’s most open markets. Any offshore fund meeting the SFC’s criteria can apply to distribute. While we have seen a drop in the percentage share of offshore funds and a concomitant growth in the market share of Hong Kong-domiciled funds in the past few years, we believe maintaining an open platform is important to offer Hong Kong investors an array of products in a cost-effective manner. This underpins the robust growth of fund sales.
Today the industry is at an important juncture, not only because of the rapid development of reforms in the mainland, but also due to the increased connectivity of global regulation and the creative disruption wrought by technology.
Managers, distributors, regulators and investors need to engage in close dialogue to ensure the industry continues to meet the needs of customers.
Bruno Lee is chairman of the Hong Kong Investment Funds Association