CLSA plans thematic ETFs post-EIP deal

Following its acquisition of a 49% stake in asset manager EIP’s exchange-traded funds business, equity broker CLSA plans to launch a range of ETFs in Hong Kong by the end of the year.

CLSA has shortlisted three potential products for listing in Hong Kong, but declined to give more detail.

The firm acquired the 49% stake in Hong Kong-based EIP’s Xie Shares ETF business, with the aim of using its thematic research to produce smart-beta ETFs listed in Hong Kong.

“There are large amounts of dollars sitting in ETFs trading in Asia, but the bulk of those tend to be used to access funds for China A-shares or trading in funds listed in New York,” said Xen Gladstone, CLSA’s global head of sales. "There’s a lot of potential here."

Xie Shares’ issuances will be divided into three sections: thematic and sector ETFs drawing on CLSA research; products for outbound money from China when Hong Kong-China mutual recognition is implemented; and exotic funds, such as leveraged and inverse ETFs.

EIP’s actively managed, index and non-listed beta funds were not part of the deal. They will be managed under a new company, EIP Alpha.

The acquisition enables CLSA to provide one-stop proprietary thematic or sectoral exposure to its clients rather than via single stocks, Gladstone said.

The brokerage will wrap its propriety research into exchange-traded products (ETPs) in Hong Kong, and China International Trust and Investment Corporation, CLSA’s parent, will have proprietary products to sell to its Chinese clients.

The company has an eye on mutual recognition and enticing liquidity back from the US, where about 30% of ETF investment comes from Asia, said Bland.

But ETF managers face several hurdles in Asia, not least of which are commission-based distribution and a lack of transparency.

“The SFC [Securities and Futures Commission] is so hot to trot on some things, yet here is a gaping hole in legislation that has already been corrected across the globe,” EIP chief executive Tobias Bland told AsianInvestor. “Of the large markets, Hong Kong is the only one that has not reacted to this transparency request.”

A ban on commissions for funds not regulated under the Markets in Financial Instruments Directive (Mifid) came into effect in the Netherlands in January. The UK's Retail Distribution Review took effect at the same time, banning commission-based selling of investment products.

Commission-based distribution in the US is also giving way to fee-based distribution. “That was the catalyst for the US market,” said Bland. "That was the day it changed over from mutual funds to an ETF landscape.

“Why not copy?" he added, pointing out that Hong Kong, for example, uses Europe's Ucits fund structures.

Another issue is a dearth of ETF market-makers in Hong Kong. Bland pointed to initiatives in other markets, such as maker-taker incentives that offer transaction rebates to liquidity providers, which could be brought in.

When it launched three ETFs in Hong Kong in July, Vanguard voiced frustration at commission-based models, which persist in the region though are being phased out in certain Western markets.

But CLSA points to the increasing amount of assets going into ETPs in Asia. In the year to August, Asia-domiciled ETPs attracted new assets of $29 billion, and Japan, Hong Kong and China now command ETF asset market shares in Asia Pacific of 46.6%, 20.2% and 13.7%, respectively, noted the broker.