ROUNDTABLE: Forget about safe havens, where are the returns?

Our panel discusses safe havens, the role of the Chinese currency for investors and the expansion of China’s asset management industry into Hong Kong’s financial services sector.(part 2)  HK_roundtable
Ayaz Ebrahim (Amundi Hong Kong), Ken Hu (BOCHK Asset Management), Terry Pan (JP Morgan Asset Management)
Blair Pickerell (Nikko Asset Management), Mark te Riele (BNP Paribas Investment Partners) Funds Global: Bank of China Tower in Hong Kong reflects the Chinese bank’s effort to build an asset management and asset servicing business beyond the mainland. To what extent has mainland China’s footprint increased in Hong Kong financial services, particularly investment management and asset servicing? Hu: Hong Kong is one of the major wealth management centres in the world. Under the trends of the renminbi liberalisation and rising wealth of the Chinese, it is natural for Chinese asset management companies to set up branches in Hong Kong and overseas. Overall, there are many different players in Hong Kong that would further support it as a global wealth management centre. Yet at the same time there are a lot of foreign companies setting up in mainland China too. te Riele: There’s a very strong push by the government for all Chinese asset management companies to expand overseas and they’re starting in Hong Kong. This obviously increases competition here. These managers have a strong business when it comes to investing in China. But the real test will be going beyond that. What will they offer apart from their China or Asia knowledge? I think in a couple of years we will see where this development goes and which of the asset management companies will be able to make the jump to become a more regional player and, later on, a global one. Pickerell: There’s no doubt that it’s become fashionable in China to set up a Hong Kong office and quite a few firms have done so. We will reach a point at which a number of those subsidiaries will be successful either in selling Chinese products to the rest of the world, or acting as a sourcing base for finding managers offshore that they hire on some advisory basis to manage money from China. But I would guess that there will be a fair number of them that won’t succeed. Hong Kong is a highly competitive market and has many of the world’s leading fund management firms, and if you’re going to attract Western investors, some firms will have a naïve view that being Chinese means they know more about China than the big international firms. The fact is, the big international firms have a lot of Chinese staff. They also have a lot of discipline that western clients want to see, whether it’s risk management, compliance, control systems. It could be that some Chinese firms have underestimated the importance of those factors. There will be a shake-out over time, just like there is in any industry. There’s no doubt that there’s a very large increase in the number of Chinese fund management companies setting up offices in Hong Kong, and financial services firms in general. You just need to look down the street to see the number of branches of Chinese commercial banks… Everybody is very enthusiastic about the fact that China is opening up. From this we are getting renminbi bond funds, renminbi deposits, renminbi initial public offerings, many of us based in Hong Kong are able to increase our operations in China, and private banking in Hong Kong is growing very rapidly off the back of Chinese clients. All of that is great for Hong Kong as well as for the industry. te Riele: Chinese companies setting up here have certain advantages but also certain disadvantages. The regulator is very much pushing them to expand, which means they may have to run loss-making businesses for a while, but in return they are able to do other things. As mentioned, we will have to wait and see how this turns out and whether global managers have more success because of better structures or more experience. But I would never underestimate any competition, especially from China, because Chinese asset managers will learn fast. Ebrahim: A greater demand for talent has resulted from this. Talent is tight. There are movements between firms in terms of investment managers, analysts, and even senior executives. Experience on the mainland is still relatively new so the demand for talent is going to be a challenge because it will keep growing. Pickerell: If fund management licences in China were issued the same way they are in London or New York, there would probably be 500 fund managers by the end of the year. Funds Global: Hong Kong renminbi funds are a sign of the increasing externalisation of the Chinese currency. How do you see your business and industry benefiting from the globalisation of the renminbi? Pickerell: There are supply-side issues in terms of the renminbi bond funds that have come to market. These include the challenge of finding enough good ones to invest in and the underlying liquidity of those bonds, especially when renminbi stock depreciates. There is
also a lack of transparency about the credit worthiness of some of the issuers, some of which don’t get credit ratings. After all, why bother with a credit rating because the bond issue is going to sell out anyway? Pan: Renminbi bonds are a welcome development. The regulator is taking a prudent path in terms of authorising products but by no means is this impeding their growth. They want to get it right – that’s the important thing.
I agree with Blair about the supply-side issue; from an investor perspective there are not enough things to buy. But, ultimately, if we fast forward five or ten years, what then will be the perception of the investor in terms of the renminbi as a currency, not just as a currency play? It will be a time of a lot more opportunity for us. te Riele: For me, the globalisation of the renminbi is going to be a gradual process because it’s extremely complicated and would have a huge impact on the global economy, particularly the Chinese economy. A gradual process needs to be managed. There’s regulation to manage this and its people are doing a good job. The short-term issues are very much there in terms of liquidity, in terms of supply. In five to ten years from now, renminbi fixed income will be a major asset class globally and will be able to compete with European and US fixed income. Hu: I agree that we should think of the offshore renminbi on a global basis. Given the size of China’s economy and its volumes of international trades, the offshore renminbi will rise as a major asset class in the world. The onshore bond market in mainland China is already large, ranking sixth in terms of size. The offshore renminbi bond market is likely to grow big and fast. Looking forward, the offshore renminbi bonds may not only be issued in Hong Kong. They may be issued in other international financial centres of the world, like Eurodollar bonds. As the global demand for the renminbi as a means of storing wealth and international transactions will rise, there are strong natural demand for and supply of offshore renminbi bonds. Funds Global: What is the evolution of product development like by investment managers in Hong Kong and mainland China? Is complexity a feature? Pan: In Hong Kong it has very much been equity driven, with some fixed income. Over the last couple of years we have seen a surge in global fixed income, emerging market debt, Asian debt, and Asian high-yield. Also, monthly distribution fixed income products are becoming more the norm rather than the exception. More recently, dividend or income paying equity funds have also been more popular. From a general product perspective, income, yield and simplicity are important. One thing that concerns me, particularly as in the second quarter there was a move towards the fixed income theme, is whether investors will have a tolerance for fixed income volatility in the same way they do with equities. That’s going to be something that from a product provider perspective we’ve got to bear in mind. te Riele: The global financial crisis has had the biggest impact on the product development side of our industry. There has been a huge shift towards all the areas that were just mentioned. Transparency has become increasingly important, which is a very good thing, and we have to be able to explain everything in a clear way to investors. Although there are thousands of funds available in the market, there’s hardly any period where we’ve seen a slow down in terms of new developments. We continue to come up with new features and new areas; it can be in issuing new share classes, it can be monthly dividends, it can be using different instruments. I don’t see this stopping in the near future. Ebrahim: A challenging area in terms of mainland China is differentiation of funds. The fund range in Hong Kong is a lot broader. Basically, in mainland China the mutual fund industry is about local equity and local bonds. Then distributors say they can only sell the top ten funds in terms of performance. Pickerell: Product development must be heavily influenced by the regulatory environment. I’ve two areas in mind. The first is the mis-selling that happened in some of the Asian markets a few years ago. The distributors of funds have decided to implement very stringent know-your-client processes and so we have a market where, traditionally, people would buy a Vietnam equity fund one month, and three months later buy a Chinese equity fund. Then, a few months later, buy whatever is the fund du jour. But now, intermediaries are stepping in and saying a person with mid-level, class three risk cannot buy a Chinese equity fund or a single-country fund. Therefore, there is a real impediment to the traditional industry. I’m worried that we are going to see a decrease in the size of the market. The second aspect has to do with individual countries in the region. Most of us at large firms have chief operating officers who would ideally like their firms to have one fund range that could be sold in every country. But broadly speaking, because of regulators’ increased concerns, we are moving further away from that model rather than closer to it. Regulators in Taiwan, Korea, Malaysia or Thailand will all have views about how many derivatives there can be in a fund, about how much leverage to have, about what percentage of the money in the fund comes from local clients as opposed to global clients, or about whether or not you can launch a new fund in their country before it has an offshore track record. They’ll have a view on whether local content is provided in the form of a fund manager, or some sort of employee being involved. This is how product development is going to be heavily influenced by the regulatory environment and probably not in a way that our industry would like to see. They will have a view on whether local content is provided in the form of a fund manager or some sort of employee being involved. te Riele: Regulatory differences between countries in Asia – and regulatory differences between Asia and Europe – are probably among the biggest problems today. Discussions between fund management counterparts in Asia and Europe often end in people saying: “Shouldn’t you just do your own thing in Asia?” They see so many specific regulatory issues and don’t want their Ucits range bothered by Asian requests. It worries me because it takes away the wholescale advantage you have as a global asset manager. To some extent, it’s a bit strange when you meet with the Luxembourg authorities, who are extremely proud of their Ucits success globally. Asia is moving further away from that after the crisis by bringing in all these extra requirements, which make it harder and harder to sell Ucits funds because it’s more difficult to register them. Pan: The Hong Kong regulators are looking at derivatives. This is an immensely complex issue; the available instruments are constantly evolving and so is how they are used. A principle-based approach is more ideal than something rule-based. Pickerell: This all came about because of street protests [in Hong Kong] by investors who bought Lehman mini-bonds, which by and large were structured products. You would have thought that in an ideal world there would have been a flight to quality that led to the funds industry, where products have trustees, independent directors, prospectuses and so on. But, instead, we’ve ended up being more heavily regulated. These endless protests put huge pressures on the legislators and the regulator. Pan: The whole investment management industry is a victim. There is a huge difference between a mutual fund and a structured product. Ebrahim: We need regulation, we all agree on that, but there needs to be a better balance. The property sector is totally unregulated. When properties come on the market in Hong Kong, they advertise it as being in the French Riviera. There are pictures of beautiful countryside and a mansion. But, in fact, you are getting a 500-square foot apartment. That’s gross mis-selling and it’s completely unregulated. Your outlay on that is probably much more significant than for a mutual fund products. Pan: What is sad is that someone buying a multi-million-dollar home can make that decision in minutes but when deciding to invest several thousand dollars in a mutual fund they have to go through a much disproportionately lengthier process. ©2011 funds global

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