Asset managers are expanding into Asia, building a base in Hong Kong, even though markets have been difficult. The participants in our roundtable discuss Hong Kong’s potential and some of the latest regulatory changes. Chaired by Stefanie Eschenbacher.
Ayaz Ebrahim, chief investment officer, Asia ex Japan, deputy chief executive officer, Amundi Asset Management HK
Andrew Wong, partner, portfolio manager, Penjing Asset Management
Carol Wong, head of distribution, Hong Kong, China and South East Asia, BNP Paribas Investment Partners
Ronnie Wu, general partner, chief investment officer, Penjing Asset Management
Funds Global: Where do the biggest opportunities lie for asset managers in Hong Kong and what are its competitive advantages?
Ayaz Ebrahim, Amundi Asset Management: Hong Kong has a pool of talented front and back-office professionals; a sophisticated, well-regulated financial system; and free movement of capital. The rule of law and the fact that the English language is widely spoken are also helpful.
Carol Wong, BNP Paribas Investment Partners: Hong Kong and Singapore are the most sophisticated jurisdictions in Asia, apart from Japan. The key is that Hong Kong is so close to China – indeed, it is a part of China – which is a huge market that is slowly opening up. Asia is growing faster than other parts of the world so many asset managers are still expanding here, even though markets have been difficult. Active managers, exchange-traded fund (ETF) managers, hedge fund managers, alternative fund managers are all opening offices in Hong Kong, which suggests they see opportunities here.
Ebrahim: Asset managers used to open their head offices in Tokyo and even though it is still viewed as a major financial centre, it is not regionally viewed as the ideal regional hub.
Funds Global: Do you see the need for a Greater China passport or an Asian Ucits?
Ebrahim: Ucits products are still the most efficient way for us, at least until there is an Asian passport scheme that includes all jurisdictions. Right now, it looks like a fragmented concept.
Ronnie Wu, Penjing Asset Management: Hong Kong has always been the regional hub for foreign investors looking for Asian opportunities, but increasingly it is also becoming a hub for Chinese asset managers expanding overseas. Over the past couple of years, the largest Chinese asset managers have started building a presence in Hong Kong. They are getting ready for the Qualified Domestic Institutional Investor programme or for investing abroad. Competition between Hong Kong and Shanghai goes on, but there are are opportunities for both.
Andrew Wong, Penjing Asset Management: Hong Kong has been at the forefront of innovations in Asia – for example, when it comes to regulation, trading in markets and innovations in financial instruments. China can replicate this model and learn from Hong Kong.
Carol Wong: Hong Kong is also an education and training centre. Chinese companies, even regulators, frequently travel to Hong Kong in order to learn from asset managers in areas of investment, risk management, product development, distribution, sales and marketing.
Wu: Thirty years ago, when China first started building its manufacturing capability, it sought Hong Kong and Taiwanese manufacturers. Since that time, China has built a huge manufacturing base. It is likely China will see a similar development in financial services because professionals from Hong Kong move to Shanghai. I expect more and more domestic companies to compete with their Hong Kong counterparts, or even globally.
Funds Global: What signals do other recent schemes, such as the Qualified Domestic Limited Partner (QDLP) programme, send?
Wu: The QDLP programme is specific to Shanghai and indicates that China is trying to attract foreign alternative asset managers to open offices in Shanghai. One reason could be skill transfer.
Funds Global: Take up of the first batch of Renminbi Qualified Foreign Institutional Investor (RQFII) funds was slow. What do you expect from the second batch of RQFII funds, which will be structured as ETFs?
Carol Wong: The renminbi will become one of the core currencies in the world, on a par with the euro and the dollar. However, the renminbi is only slowly evolving owing to concerns over liquidity. Earlier this year, Chinese regulators announced adding renminbi 50 billion ($7.9 billion) to RQFII. There will be more demand for renminbi-related products and as China is freeing up the renminbi, it will be easier to develop them. The past two years were heavily skewed towards fixed income products. Investors were risk-averse and parked much of their money in fixed income. Once markets turn, it is likely equities will come back in favour.
Ebrahim: Products that encompass the renminbi will see greater demand. Initially, renminbi-related products gave exposure to the renminbi, full stop. Now that investors have realised that the scope for currency appreciation is not as great as previously thought, renminbi-related products need to be more innovative. Renminbi high-yield could be one interesting innovation.
Carol Wong: The rate of return for the RQFII products is similar to those of timed deposits that banks in general are offering right now. This has curbed the growth of renminbi investment products in Hong Kong. As the corporate market is developing and growing, we see opportunities there because corporate debt does offer higher yield. Risk, however, is another concern. Many asset managers are looking to launch renminbi corporate debt in the coming future. The challenge is how to monitor the risk; there is not a lot of reliable information about companies from ratings agencies.
Wu: Some of the trends we have seen are increased risk appetite, simpler and lower fees. One reason Ucits has not caught on as well in Asia as in Europe is the fees. Institutional clients in particular are fee-sensitive.
Ebrahim: The acceptance of the performance fee threshold is low, at least compared with Europe and the United States. It is a tough environment because general management fees are already under pressure.
Funds Global: Do you see any changes from the regulator in Hong Kong to meet increased scrutiny of investment products?
Andrew Wong: Although we do not deal with Ucits funds on a day-to-day basis, we see limitations to accommodate certain features. Some of the more complex and less liquid instruments are simply not suitable to be included in a Ucits strategy.
Carol Wong: After the Lehman minibond crisis, the Securities and Futures Commission has launched several measures to try to prevent mis-selling of any investment products. This includes more detailed disclosure of the risks of the funds. Frequent and recorded assesment of each indivicual investor’s risk/return profile, banks selling to retail investors have become careful. The regulator requires asset managers to categorise funds into those that employ derivatives and those that do not.
Ebrahim: Regulators are increasing their scrutiny, but they have also been good engaging with service providers to ensure the regulation is adequate. There is a two-way communication as opposed to a big, strong sort of fist in an unproductive way. It is tightening of regulation but in a very constructive way.
Carol Wong: In the past, guaranteed products in Hong Kong were common. Approval was simple and as long as the regulator saw that investors had their investments guaranteed. Now the regulator is requesting collateral and looks at what collateral is used. If it is considered unsafe and not transparent enough, the regulator will no longer allow registration of these products for sale to retail investors. It does not necessarily mean high risk but, owing to complexity, it is difficult to explain and ensure full understanding.
Funds Global: How important is it to educate retail investors about the complexity of these products? Is there a demand for this type of information at all?
Carol Wong: We see a strong demand from our clients. Banks and insurance companies are requesting educational sessions for their people. We organise monthly investment academies – just training on investment concepts, rather than product selling. Such events are popular and we are not the only asset manager organising them. Investors want to understand the products so they can make an informed choice and diversify their investments.
Funds Global: What are likely to be the most dramatic effects on your businesses arising from international regulation?
Carol Wong: The Foreign Account Tax Compliance Act means we need to implement a new set of monitoring systems or agreement with our distributors in order to make sure that they are compliant. This involves cost and consumes resources. It will affect our distributors more in that sense because they are the ones who deal directly with the clients. We are already seeing some grievances among our distributors saying that this is really tough for them to monitor such implementation. Whereas the Dodd–Frank Wall Street Reform and Consumer Protection Act is affecting investment advisors conducting business in the US. It requires some of our entities need to be registered with US Securities and Exchange Commission and, again, would involve costs. The Alternative Investment Fund Managers Directive is mainly affecting our alternative investment products in general in Europe.
Andrew Wong: We mainly deal with institutional clients and hedge funds. Slowly and gradually we could be seeing more attention from the regulators – looking for more transparency in the form of more disclosure requirements, rather than more stringent rules. We have already seen the bar raised in terms of disclosure and communication with investors.
Funds Global: In terms of domiciliation, do you expect regulation to impact the choice of domicile?
Andrew Wong: Most of the fund structures we deal with are Cayman Islands-domiciled. It is one of the most popular and hedge fund-friendly jurisdictions. Not just retail but increasingly also institutional investors are looking for better transparency and liquidity. We have seen already a trend moving into managed accounts and Ucits structure. Ucits could become more popular, certainly for more liquid strategies.
Carol Wong: We also set up some mandates for institutional clients who demand a faster and cheaper set-up. The Cayman Islands is one of the choices for them. Others, however, respond to such a structure with wariness and tell us they face compliance issues. Many view Luxembourg-domiciled Ucits as easier to promote to their retail clients. Institutional investors know the risks and know what they want so they might opt for Cayman Islands or Dublin as a result.
Ebrahim: Asset managers that are not going to sell internationally may prefer local vehicles, which are often easier to set up and quicker to get inplace. Whereas asset managers pursuing a global strategy will usually opt for Ucits.
©2012 funds global
