BEA ponders best time to take mutual recognition plunge

Bank of East Asia (Hong Kong) is taking a wait-and-see attitude towards Hong Kong-China mutual recognition ahead of the scheme’s launch tomorrow (July 1). 

The bank’s head of investment products and advisory said it would be too early to add China-managed funds onto its platform in the next month or so, but it will eventually participate in the scheme. He cited concerns over introducing small and mid-cap A shares because of valuation worries.

Meanwhile, BEA is planning to roll-out a fee-based advisory solution for Hong Kong investors in the coming months. This will be an alternative to the common practice of banks charging trail fees on fund sales.

Alfred Mak, head of investment products and advisory, told AsianInvestor that China managers had offered BEA their funds investing in mainland equities, such as small and mid-cap stocks.

“I personally have reservations about introducing these funds, especially because of valuation concerns,” said Mak. Chinese stocks have become pricey over the past year, despite a fall in A-share prices in recent days; for instance, as of yesterday Shenzhen stocks were trading at 30 times 2016 earnings estimates.

Mak said Hong Kong investors already had access to the mainland China market via authorised funds already sold in the city. Retail investors have also been heavy users of the Shanghai-Hong Kong Stock Connect scheme.

“The initial benefits of mutual recognition to Hong Kong will not be that much. The timing is not right,” he noted, but voiced his belief that there will be demand from Hong Kong in the long term.

BEA has started conducting due diligence on mainland fund houses. “I would say distributors have started looking at viable products but I will say in general terms we will offer our client a product when the timing is right.  That said, we might have not a product on the shelf during the first month,” said Mak.

The bank has categorised mainland fund managers into three groups: mainland firms with joint ventures with international fund houses; mainland firms with Hong Kong operations; and pure domestic players.

“It is easy to do due diligence on the first group as we know the international fund houses – those are our priority. Our second priority will be the mainland firms with Hong Kong operations. We have a lower priority on the third group,” said Mak, who has a eight-strong team responsible for fund selection.

BEA has an open architecture platform with around 400 products on the shelves. “We are a retail bank with a big presence in Hong Kong,” Mak said. “We basically work with everybody."

On its plans to introduce a fee-based advisory solution for Hong Kong investors, Mak said the move reflected a trend within the banking industry.

“Banks are trying to migrate from execution model to advisory where they charge an advisory fee based on AUM,” he said. “We are exploring the possibility of moving into an advisory model which will be launched at an appropriate time.”

BEA is one of the largest independent local banks in Hong Kong, with total consolidated assets of HK$795.9 billion ($102.6 billion) as of December 31 last year. It declined to provide AUM numbers for its retail funds/wealth management business.

In a related note, research firm Cerulli Associates said mainland Chinese managers stood to benefit the most from mutual recognition.

“Mainland managers are well placed in mutual recognition,” the research house said.  Based on its analysis, Cerulli said that of the 20 mainland managers with the highest number of qualifying funds under the scheme, all 20 either have a subsidiary operating in Hong Kong, a foreign partner in Hong Kong, or both.

It also noted that several China managers with foreign partners have been highly successful in Hong Kong. This means that they will have less of a problem reaching out to distributors if they participate in mutual recognition.

The same cannot be said of foreign joint ventures in China. They have struggled to consistently provide products and investment strategies that capture the interest of Chinese investors amid a challenging distribution landscape, Cerulli said.

Citing data from the Hong Kong Investment Funds Association, the research firm said demand for China funds in Hong Kong remained strong - China-focused equity funds were the third best-selling category of equity funds in Hong Kong in the first quarter of 2015, after Asia ex-Japan and European equity funds.

“With such drivers in place, the odds look to be very much in favour of the China managers that have a presence in Hong Kong in the mutual recognition space,” it said.