Mind China’s perception gap, firms urged

There’s a perception gap among Chinese investors that Hong Kong fund distributors and manufacturers need to be aware of prior to the launch of the cross-border mutual recognition scheme, a forum heard.

Panellists at the Hong Kong Investment Funds Association conference last week agreed that both distributors and fund houses needed to work together on such things as product transparency and investor education ahead of the scheme’s launch, which is expected imminently.

Question marks have been raised over how well retail investors across the border understand the products they invest in.

The panel noted how mainland investors had been refraining from China’s stock market, instead seeking out conservative instruments such as money-market funds and pre-packaged loans wrapped up as wealth management products – essentially financing schemes for property developers similar to special-purpose vehicles used in securitisations.

“As mainland investors did not have very positive experience from their overseas investment, primarily done through the qualified domestic institutional investor [QDII] scheme, they have been keen on money-market funds in recent years due to their perceived lower risks,” noted Rosita Lee, head of investment products and advisory business at Hang Seng Bank.

However, they have been investing believing these products to be capital-protected, which is often not the case. They are unaware they are taking on credit risk, given that the underlying investments are often commercial paper issued by financial or non-financial institutions, Lee added.

“This is what’s bothering me. Customer education and product suitability are very important,” she stressed. Hang Seng is one of a handful of international banks recently allowed to distribute mutual funds on the mainland.

Terry Pan, head of Hong Kong business for JP Morgan Asset Management, agreed with Lee, but stressed that education efforts should not just be targeted at end-investors, and that distributors also had to learn the skill-sets required to manage investor expectations.

“Every investor wants low-risk, high-return products,” Pan said. “But [the reality] is that nobody can get return by bearing no risk. The key [for fund providers] is to work with distributors so they can understand [investor needs]. It is also about managing expectations of end-investors.”

Launched in 2007, QDII has not been a popular investment channel for mainland investors. One argument for its lack of traction is that products were launched shortly before offshore equity markets tanked amid the global financial crisis, resulting in losses.

Lee noted that estimated QDII fund sales made up as little as 2% of total fund sales in China.

The forum heard that since 2008 the pool of investable assets in China had been growing faster than China’s GDP growth rate.

A survey by Forbes and CreditEase, presented at the forum, found that 80% of mainland investors preferred short-term products with a tenor of one-to-two years.