Managers map out northbound mutual recognition plan
Hong Kong managers have discussed their distribution plans under the pending mutual recognition programme for the first time, revealing their interpretation of the rules in the process.
Speaking at a roundtable yesterday organised by the Hong Kong Investment Funds Association (HKIFA), they forecast that Hong Kong equity products would be first off the shelf once the scheme officially launches next week, although they expect a slow burn as everyone adapts to the rules.
In particular they spent time discussing the scheme’s different distribution models, including multi-agents, that appeared to allow them to appoint different distribution agents for each fund launched.
Eleanor Wan, chief executive of BEA Union Investment, suggested her firm intended to appoint a distribution agent for each fund it launched under the programme.
The rules require Hong Kong firms to appoint as agent a fund manager or custodian authorised by the China Securities Regulatory Commission (CSRC). In the event that a partner does not have a distribution capability, they can appoint a distributor separately.
Overall BEA Union – a joint venture between Bank of East Asia and Union Asset Management – has nine eligible funds under the cross-border scheme.
Wan said it planned to market one or two funds once the programme went live. However, she cautioned that distribution agents would not want a plethora of funds to be introduced at the same time owing to marketing and education challenges.
She said the firm had yet to confirm an agent, but that she would look for a partner with a sound understanding of China’s onshore distribution business.
“Fund registration is a straightforward exercise, but how to bring your product to mainland [clients] requires deep knowledge,” she told the roundtable.
HKIFA chairman and roundtable moderator Bruno Lee noted Hong Kong firms would need to submit supplementary documents to the CSRC. The Chinese regulator would then need to make checks regarding those firms with Hong Kong's Securities and Futures Commission (SFC).
While he suggested the process would take less than one month in the case of simple products, he added that the first round of fund approvals might take a bit longer.
But Lee said the challenges for Hong Kong managers would be to keep costs down for marketing, advertising, training and education, which could be 10 to 15 times higher than in Hong Kong.
Franco Ngan, chief executive of Zeal Asset Management, said his firm would look to digital distribution on mobile and internet platforms as it would be quicker and less costly. “The use of these new methods for distribution cannot be underestimated,” he said.
He said the firm was in the final stages of signing a contact with its distribution agent, but declined to reveal who that was.
Zeal is a Hong Kong-based boutique founded by former Value Partners managers in 2009. The firm has one eligible China-Hong Kong long-biased equity strategy for mutual recognition.
Keith Yuen, regional vice-president of Principal International (Asia), said its mainland joint venture – CCB Principal Asset Management – had an extensive distribution network in China.
He noted it would appoint the joint venture as its distribution agent, given that China Construction Bank was its JV partner.
At present CCB Principal sells three qualified domestic institutional investor (QDII) funds sub-advised by Principal. The US-based firm has six eligible funds for mutual recognition.
Yuen said the each-way Rmb300 billion ($48.3 billion) quota would take time to be used up since the rules state the value of shares sold to mainland investors could not exceed 50% of a fund’s total assets. Besides, Chinese investors can already gain offshore exposure via QDII.
BEA Union’s Wan agreed that quota usage would be moderate to start with as the market familiarised itself with the system. She said her firm was awaiting more technical details on mutual recognition before making a move.
Ngan suggested the first wave of products put forward for application would be Hong Kong and China equity funds. He noted China investors tended to invest in Hong Kong equities for two reasons: as the first step to global exposure, and because Hong Kong equity had a lower valuation than A shares. The HSI price-to-earnings ratio stood at 11.4 times yesterday, well below the 21.3 times on the CSI300 index.
Yuen added that fixed-income funds were unlikely to be selected in the first stage because the China onshore yield was far higher than offshore.
But he said mixed asset funds had longer-term potential due to lowered expectations of RMB appreciation and a need for stable returns.
About 100 Hong Kong-domiciled funds were eligible for northbound sales in mutual recognition as of end-2014. According to a Morningstar research, the top three fund companies with eligible funds are: JP Morgan Asset Management (33 funds), BOCI-Prudential Asset Management (21 funds) and PineBridge Investments (10 funds). The top three by asset size are: JP Morgan Asset Management (27.15%), Hang Seng Investment Management (20.65%) and State Street Global Advisors (14.76%).