HKIFA talks up fund sales record, RMB share classes

Hong Kong is on course to smash its 2007 record high for fund sales this year, more than tripling the tally of three years ago, finds the Hong Kong Investment Funds Association (HKIFA).

Speaking at a conference to unveil figures for the first seven months of 2012, the association’s new chairman, Lieven Debruyne, cast the turnaround since the financial crisis as remarkable.

At the same time he also set out two specific goals the association is focusing on: broader participation from the funds industry in the process of RMB internationalisation, and expansion of the retirement system, in particular the city’s Mandatory Provident Fund scheme.

While he describes the development of renminbi liberalisation as a real positive for Hong Kong, Debruyne notes: “Clearly RQFII has been beneficial to domestic Chinese asset management companies, but not for international asset management companies here in Hong Kong.

“I believe that as RMB development continues it needs to be something from which all parties benefit and to which all parties contribute. As an IFA we want to make sure we move in that direction.”

He talked up the prospect of Hong Kong’s funds industry being able to launch RMB-hedged share classes around a range of products with underlyings not issued in renminbi. He gave the example of a HK equity fund purchased from an RMB deposit account and hedged in RMB.

This is primarily related to retail funds rather than the MPF range, with Debruyne suggesting the first step would be to add RMB-hedged products to Hong Kong’s retail market.

However, he notes: “The MPFA has looked into this and so far has taken the decision not to have it. Looking at it from a Hong Kong investor, and even a retirement savings, perspective, to me it makes a lot of sense to have an RMB product also available within MPF.”

Sally Wong, chief executive of the HKIFA, added that the proposed concept put forward by fund managers was a wish to add an RMB-hedged share class to a Ucits fund.

“Of course, one may argue that RMB is different from the US dollar, euro and Aussie dollar as the former is not freely convertible,” she says. “But we believe that as the currency has moved into a more healthy trajectory [widening of the daily band this April, no longer a one-way bet] and now there are more hedging tools, this is a more plausible proposition.”

She stresses that the type and range of RMB products in Hong Kong is too limited and that as the leading offshore RMB centre Hong Kong should take a leading role in product innovation.

Debruyne also notes that the HKIFA is eager to work not just with the Securities and Futures Commission, but also to build a relationship with mainland Chinese regulators.

“As an IFA there is merit in building a direct relationship with the regulator in China,” he says. “There is no dialogue at the moment but I think it is something we seriously need to consider.”

However, he also notes an RMB-hedged share class is a decision for the SFC, not the Chinese regulator.

On the city’s fund sales figures for the first seven months, gross sales totalled $28 billion, with net sales of $7 billion. That represents a year-on-year increase of 14% and 20%, respectively.

Fund flows have been robust throughout the year, with monthly gross sales hovering between $3 and $4 billion, and net inflows in each of the first seven months.

Extrapolating the data for full-year 2012, the association forecasts gross sales of $48.5 billion – smashing the record of $45.5 billion in 2007. That compares with full-year gross sales figures of $18 billion in 2008 and $15 billion in 2009.

Broken down by asset class, bond funds dominate and take 68% of year-to-date sales, compared with 21% for equity funds. That is a marked change from 2011, when both bond and equity funds made up 44% each. Compare 2007, when equity funds accounted for 84% of fund sales.

In terms of categories, global bond funds came out top in terms of gross sales ($6.8 billion) and net sales ($2.4 billion), followed by high-yield bond funds with $3.9 billion and $1.6 billion, respectively.

Debruyne notes if you add in balanced funds, comprising equity and debt, the figure is an even more lopsided 75-80% of industry sales. “I expect low-risk income funds to continue to remain dominant, at least until the end of this year,” he says.

“This is a great positive for the funds industry because it means in this low interest-rate environment that investors are looking for an alternative to having their money in deposits.”

Asked his views on commissions, Debruyne says he will be watching with interest to see how the UK fares, having abolished commissions on its non-discretionary IFA market. But he points out distribution in Hong Kong is dominated by banks and insurers.

He reckons it depends on what type of product you sell; commissions work well with a standard commoditised product, but once you get into advisory, a fee structure covers that better because the interests of the buyer and seller are aligned.

“There is probably room for change, but I can’t imagine the right thing to do would be to abolish commissions completely,” adds Debruyne. “I would say there is probably something there to review front-end loads, but we need to do more work on it rather than jump to conclusions.”