HK-domiciled platforms must go global: custodians

Asset managers mulling setting up Hong Kong fund platforms should develop global products from the get-go rather than focusing only on Asian underlyings, say custodians. Otherwise, they argue, mainland investors will show little interest in the Hong Kong-China fund mutual recognition agreement (MRA).

Some international fund houses are already making moves on this front. This should create a wider range of onshore products that is currently lacking, as qualified domestic institutional investor (QDII) products are heavily focused on Hong Kong equities.

QDII managers have tended to fixate on Hong Kong equities, and investment opportunities in Europe and the US have not been fully presented to Chinese investors under the scheme, says a custodian banker in charge of cross-border investment fund servicing in Beijing. (Admittedly, a major reason for this is that Chinese houses and JVs’ expertise will largely lie in mainland and Hong Kong securities.)

Hong Kong equity accounts for 62% of QDII equity investments, with US equity (17.9%) a distant second, followed by Korea (6%), Taiwan (2.8%) and UK stocks (2.2%), according to Morningstar figures for the third quarter of 2013.

Both global and Chinese custodians say keen interest in the MRA from Hong Kong and foreign fund firms has not been matched by their mainland counterparts. This is not hugely surprising, note sources, given that the MRA would offer more opportunities to firms with global expertise than to Chinese players.

Nevertheless, some fund managers and custodians in Beijing have heard little about the plan, note custodians. Even those that have say it is unlikely to spark the sort of excitement as the qualified domestic institutional investor (QDII) scheme when it was rolled out in 2006. This is partly due to losses sustained by Chinese retail investors on QDII investments.

Firms such as Amundi, BlackRock, Franklin Templeton and Vanguard have been expanding their Hong Kong fund platforms. The expectation is that a pilot programme for MRA will be announced this quarter by Chinese and Hong Kong regulators.

However, some global fund managers with Hong Kong unit trust platforms have not taken the next step to launch global equity or fixed income products, says Yap Chee-ping, Asia-Pacific head of fund services for Citi’s securities and fund services arm.

But that is likely to change. While the funds on BlackRock’s HK unit trust platform track China, Hong Kong or Asia ex-Japan equities, the firm has said it plans to develop non-equity products, for example.

Clients are indeed talking to their service providers about using a Hong Kong fund platform to launch products that invest in global markets, confirms Camie West, Asia head of global fund services at Northern Trust.

Arguably, fund managers eyeing the mainland market need to have better performance than the local firms or have a strong brand in China, she says. “Given the latter will take time, a diversified product offering makes sense.”

Northern Trust in April 2013 began offering fund administration services supporting Hong Kong funds on the back of rising demand for such products. Around 300 of the 1,800 funds authorised by the Securities and Futures Commission are currently Hong Kong-domiciled, but that number is growing.

One challenge for non-Asian managers in terms of Hong Kong domiciling is that their global equity or fixed income investment teams tend to be located outside the region, says Citi’s Yap. It would be difficult for an asset manager to get product approval for a Hong Kong unit trust product that invests in US or European securities but is managed by a team sitting outside Hong Kong, he argues.

Hence, some firms planning products for distribution into China through an HK funds platform must undertake a broader strategic review, says Yap. They need think about housing part of their global investment capability in Hong Kong, he adds, and some have started to understand the need for such doing so.

Others are taking more of a ‘wait-and-see’ approach – such as Principal Global Investors and UBS Global Asset Management – with the view that Ucits products are likely to remain popular in Asia for some years yet.