Harvest prioritises retail sale for RQFII fixed income fund

Harvest Global Investments' fixed income business aims to focus on RQFII products, CNH bonds and Asian credits for the foreseeable future on the understanding that China will dominate Asia’s bond market for years to come.

The international arm of China’s Harvest Fund Management Company is now engaged in fundraising for an open-ended RMB qualified foreign institutional investor (RQFII) fund.

The product will invest chiefly in the domestic Chinese bond market with a mixture of bonds from the government, quasi-sovereigns, state-owned enterprises and corporates.

It will also be able to invest from zero to 20% in equities, and as such Harvest plans to adopt an asset-allocation style approach in a drive to generate alpha. It launched a month-long IPO process on January 16, with the fund due to begin operation on February 22.

Thomas Kwan, Harvest’s newly appointed head of fixed income based in Hong Kong (see AsianInvestor’s most recent job-hoppers column), says the primary focus of the fund will be anything other than high-yield – which is a relatively small market in its infancy in China.

“We will target 50% exposure to mainly high-grade credit,” Kwan explains. “The rest will be government, quasi-government and some agency bonds.”

He notes that Harvest has a sector neutral view at the moment, and says it will not seek to avoid financials. “We understand offshore investors are concerned about local government debt and its implications for banks, but I think the situation is manageable. It is a matter of how they are going to manage it, not whether they can solve it.”

The RQFII scheme was introduced last month to permit Hong Kong subsidiaries of Chinese fund companies and securities firms to raise renminbi offshore and invest back into the onshore securities market.

An initial quota of Rmb20 billion ($3.1 billion) was announced to be shared among firms approved for a licence, and already this sum has been allocated in full to 21 companies (nine fund managers and 12 securities firms).

As at January 19, the Securities and Futures Commission had approved 17 RQFII funds for distribution in Hong Kong. Harvest was awarded Rmb1.1 billion to invest.

Kwan says interest in Harvest’s RQFII fund has been strong in Hong Kong and overseas, with the product available for sale to retail, high-net-worth and institutional investors.

But he stresses that Harvest’s preference is for retail investors, and not because of the slightly higher fees it is able to charge them (1.2% for retail, 0.6% for institutional).

“At the end of the day, the fee that we receive from retail investors versus institutional is very similar,” he notes. “The main reason [to sell to retail] is that we don’t want to just sell out of this product, we want to use it to establish our brand presence in Hong Kong and overseas markets. So it is a more strategic reason for the firm to target Hong Kong retail investors.”

Kwan also argues strongly that now is an opportune time to be launching such a product from both a macroeconomic and valuation point of view.

“China’s credit market sold off in the second half of last year and has experienced quite a bit of repricing,” he notes. “There was a lot of concern over credit conditions and credit quality in China.

“Now some of the domestic credit looks cheap. At the same time we are expecting some monetary policy relaxation this year. We think in the second half China’s GDP growth will pick up more strongly, so the credit conditions should improve over the year.”

He adds his expectations that China’s A-share market – which sold off 25% last year – will rebound and deliver 15-20% returns this year as valuation indicators such as P/E and P/B are at multi-year lows. “For investors who want a higher rate of return but without too much exposure to equity, I think this product is being launched at a very suitable time.”

In general, Kwan says Harvest’s priorities for the fixed income business this year and beyond will be RQFII products, CNH bonds, as well as Asian credit with a China focus.

He is in no doubt that China will continue to dominate the Asian bond market over the next few years. In 2011 China accounted for 32% of Asia-Pacific bond issuance by value (Rmb267.4 billion of Rmb841 billion), compared with 25% in 2010.

“I would say for anyone managing Asian bonds today, you need to foresee what the market will be in five years' time,” he adds. “Being part of a Chinese firm with expertise on Chinese companies will offer advantages in terms of managing Asian bond portfolios above any other fund house.”