With the largest deal in China’s asset management industry done and dusted, Mackenzie Investments CEO Barry McInerney thinks investors should consider separate allocations to Chinese equities. Nick Fitzpatrick reports.
Barry McInerney, formerly co-chief executive of BMO Global Asset Management (BMO GAM) – the Canadian firm that bought the UK’s F&C Investments in 2014 – says Chinese equity markets are mature enough for some investors to consider separate allocations.
Easier market access and risk diversification are reasons why some investors might hold China outside of a broader emerging markets allocation, he says.
“China is more investable today. Whereas before you could only enter through QFII [the ‘qualified foreign institutional investor’ regime], things are moving fairly quickly now that we have the Stock Connect programmes,” says McInerney, who is now president and chief executive of Mackenzie Investments, another Canadian asset manager. Stock Connect refers to cross-border trading initiatives involving the Shanghai, Shenzhen and Hong Kong stock exchanges.
He adds: “What’s really interesting about Chinese equities is they are a risk diversifier. At the current point in time, the correlation of the China stock market is very low – not just to developed markets, but also to emerging markets.” (See table, opposite page.)
Attractions include China’s e-commerce and electric car industries, the largest in the world. Canada does not have those industries, making the diversification case particularly strong for Canadian investors, says the Toronto-based CEO, adding that Canadian asset owners would typically weight towards domestic stocks, followed by the US, and then make broad international allocations.
“When I started in the industry in the late 1980s, emerging markets were brand new. People saw they were very volatile markets, but eventually people began to make separate allocations to EM outside of their global equity allocations,” says McInerney.
An exciting time
A deal that piqued his interest in China is his firm’s involvement in one of the largest joint ventures there.
In June 2016, he left his position of co-chief executive of BMO GAM after seven years in the role. A month later, he became president and CEO at Mackenzie Investments. It was an exciting time to join, as the firm launched a Chinese asset management investment partnership with Beijing-based China Asset Management Company (China AMC).
Mackenzie is owned by IGM Financial, a Toronto-listed asset and wealth manager. In turn, IGM Financial’s owner is Canada’s Power Corporation, a management and holding company with interests in financial services and energy, among other sectors.
Power Corporation had a 30-year relationship with China AMC’s largest shareholder, CITIC Securities. Together with IGM Financial, the Power group has a nearly 28% stake in China AMC, for which IGM Financial paid 647 million Canadian dollars for its 13.9% share.
The deal closed in 2017 and is the largest Chinese asset management joint venture by assets under management (AuM) so far made.
Mackenzie gained access to China AMC’s country-wide business, which includes 120 million clients.
China AMC was founded in 1998, invests in equities and bonds, and has a Hong Kong subsidiary. McInerney says the firm is a pioneer in the Chinese asset management industry. It sub-advises some of Mackenzie’s mutual and exchange-traded funds, including the Mackenzie All China Equity Fund managed by Richard Pan. At year-to-date November 27, the fund had returned almost 36%.
Performance over roughly the past two years reflects US-China trade tensions. In the 12 months to the end of Q1 2019, the fund saw a loss of 4.5% but compared favourably to the 4.9% index loss.
In Q1 itself, as trade tensions alleviated and purchasing managers index data recovered to above 50, the index bounced back with a return of 22.3%; the fund beat this with a 24.3% return.
Meanwhile, Mackenzie sub-advises the China AMC Mackenzie Global Strategic Income Fund distributed by China AMC’s Hong Kong subsidiary.
“China AMC looks a lot like us. We are roughly the same size and have multi-channel and multi-asset capability,” says McInerney.
China AMC had the equivalent of US$153 billion (€138 billion) of AuM at June 30. Mackenzie had 138 billion Canadian dollars of AuM, or US$104.4 billion.
He adds that China AMC has the advantage of being a young company. This means that the firm is not hampered by legacy systems and its internet activity in China is “huge”.
Having 120 million clients – that’s about one in every nine Chinese adults, according to the firm – means China AMC has “more clients than there are people in Canada”, McInerney says. Canada’s population is 37 million.
Falling out
Relations between Ottawa and Beijing have been strained since last December, when police in Vancouver arrested a Huawei Technologies executive in relation to a US extradition bid. Since then, China has detained two Canadians, including a businessman and a former diplomat. The issue is said to have resulted in postponements, delays and cancellations of lucrative business opportunities. However, some pundits expect relations to normalise next year when Canada and China celebrate 50 years of diplomatic ties.
Mackenzie is in a position to help build bridges. McInerney says he’s comfortable when he visits China. He points out that the countries’ good relations date back to the Great Chinese Wheat Famine, which began in the late 1950s.
At a time when China had no diplomatic dialogue with the West, a deal was struck to export Canadian wheat to China. This led to Canada becoming the first Western power to recognise the People’s Republic of China as a sovereign state.
“Canada and China have a strong relationship going back a long way. Power Corporation’s relationship with China goes back 40 years,” says McInerney.
“You have to take a long-term view of relations with China. Some firms are not going there, but I go there and am not worried.”
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