London manager sets out on QFII mission

City of London Investment Management is poised to start investing directly in China A-share funds after receiving a $100 million QFII quota from the State Administration of Foreign Exchange.

The firm manages $5.1 billion in listed closed-end funds in emerging markets for over 320 institutional clients, largely US. It received a QFII quota this June after almost a year-long wait.

Fund manager Christopher Weaver notes there are 30 listed closed-end funds in China with a combined $12 billion. The firm, which already runs a $100 million A-share strategy out of Singapore, entered the A-Share market in 2003, just after China introduced its QFII programme.

It invested through UBS, the first foreign institution to receive a QFII quota in June 2003, and has since used investment banks to get exposure, latterly through participation notes (P-Notes).

But as Weaver says, this was not ideal since City of London needed to rely on whether the banks had spare capacity. “Even when we had demand from clients who wanted to invest through our China A-share fund, we couldn’t allocate because we didn’t have quota. There was always the risk that when you sell your P-Note the investment bank won’t allow you to reinvest.”

Prior to its QFII allocation, City of London IM’s Singapore team invested in funds managed by around 17 domestic Chinese managers. “There is a lot of value in the China A-share market,” says Weaver. “We’re in discussion with institutional clients to manage QFII quota for them.”

The firm, which has been talking to institutions in the US and European banks about A-share funds, will need to fully invest its quota by December or risk losing some of it.

One of the things about listed closed-end funds is that they go up and down with the broader market. “When the market goes up we do see institutional investors rebalancing a bit,” says Weaver. “When the market falls they put money back in.”

Typically he wants to see a track record of three years and a stable, transparent management team. He stresses that the firm takes corporate governance seriously and promotes independent boards that take responsibility for maintaining a fund discount at an appropriate level.

“If a fund falls out of favour we can pressure the board to do something about it, which can mean the fund becomes open-ended, there’s a change of manager or they do a buy-back,” he adds.

City of London IM was set up in 1991 by present CIO Barry Olliff and received seed money from US institutions. “It has been a product that appealed to them as they made their first foray into emerging markets,” says Weaver. “Clients saw us as a good first step.”

The firm now runs four strategies in listed closed-end funds. The dominant one is emerging market equities, which accounts for £4.9 billion and has 112 underlying funds. It also runs strategies for China A-shares, frontier markets and global developed.

Overall the firm has 78 staff, of which 30 are investment professionals, with offices in Dubai, Singapore, London and Philadelphia. London is the biggest centre for closed-end funds, and Weaver says City of London IM follows 250-300 listed closed-end funds out of the city.

Typically he says a portfolio consists of 60 funds and provides exposure to 3-4,000 underlying companies. The firm holds quarterly meetings with its macro economist for a top-down view, although its allocation depends on where it sees value and can find discounts.

Weaver estimates fund turnover in the portfolio to be 30% to 50%. “If the funds have more volatility we will trade more to take advantage of that,” he says. “But if we are happy with what the manager is doing in terms of his net asset value performance then we will hold onto it.”

He estimates that 50% of City of London IM’s investments are in Asia, followed by Eastern Europe (30%) and Latin America (20%).