Hong Kong is a pilot site, say the participants of our asset management roundtable. They discuss the liberalisation of the Chinese investment market, recent drivers of growth and expansion plans. Chaired by Stefanie Eschenbacher.
Chi Lo, chief executive officer (HFT Investment Management Hong Kong)
Wang Jin, managing director (CSOP Asset Management)
Peng Wah Choy, chief executive officer (Harvest Global Investments)
Benjamin Rudd, executive director (Ping An of China Asset Management, HK)
Sheldon Gao, president (China Universal Asset Management, HK)
Chi Lo (HFT), Wang Jin (CSOP ), Peng Wah Choy (Harvest)
Benjamin Rudd (Ping An of China Asset Management), Sheldon Gao (China Universal Asset Management)
Funds Global: The number of Chinese asset managers operating in Hong Kong has risen to nine while the Securities Futures Commission is approving their funds for sale at the fastest rate ever seen. What were the primary drivers behind this?
Peng Wah Choy, chief executive director, Harvest Global Investments: Hong Kong is an extremely competitive space, where many international asset managers are already established. China’s regulators are encouraging Chinese asset managers to expand beyond the domestic market. The China Securities Regulatory Commission has recently issued licences for Reniminbi Qualified Foreign Institutional Investor (RQFII) businesses. These allow Chinese asset managers to establish reniminbi-denominated funds in Hong Kong for investment in China. In recent months, Hong Kong’s Securities and Futures Commission has approved several funds for distribution in Hong Kong. Many consider this as a ‘gift’ from the regulator to help us as an industry. Now we have to work hard to establish ourselves and compete with international asset managers. Up until recently, we had the competitive advantage that we could access China’s A-shares market, which foreign investors can only access with a licence. The Qualified Foreign Institutional Investor (QFII) scheme allows some of these international investors to invest in Chinese stocks and using money they have raised overseas. With access to China’s A-shares market, their investment universe broadens beyond Hong Kong’s H-shares market. The mini-QFII scheme, on the other hand, will allow Chinese brokerages and asset managers to do the same under separate quotas.
Wang Jin, managing director, CSOP Asset Management: Hong Kong allows us to grow globally. Chinese asset managers are still underrepresented when it comes to the global mutual fund market. Even when it comes to China-specific investments, none of the top ten China funds in the world is managed by a Chinese asset manager. We were the first Chinese asset manager to move to Hong Kong just over three years ago. While we are very popular in China, not many outside China have heard of us.
Choy: China’s domestic market has not grown substantially over the past couple of years. New players have entered the mutual fund market, but the asset base has not increased at the same rate. In essence, this means more players are competing for the same amount of assets. Some Chinese asset managers have been able to grow through joint ventures with international asset managers. We are one of the sino-foreign joint venture asset management companies, having established a partnership with Deutsche Asset Management in 2008.
Sheldon Gao, president, China Universal Asset Management: Most Chinese companies do not want to limit themselves to China; they want to be international players. After a decade of growth in their domestic market, they now feel comfortable to expand. Meanwhile, international asset managers want to move into China. This is our home market so this is where our competitive advantage lies. Many international asset managers have China funds now or they manage China as part of their emerging markets funds. Their portfolios, however, tend to look similar, all with a heavy bias towards large caps. China’s story is one of growth, not value. Which companies have the best growth potential? Not large caps. They will not be able to grow by 30%, year after year. Instead, the long-term growth potential lies in the small and mid-cap space. We are better placed to identify such investment opportunities, because we are more familiar with our domestic market.
Benjamin Rudd, executive director, Ping An of China Asset Management: We have had a presence in Hong Kong since 2006, which we have found strategically useful. We have been able to manage assets with a strong global macro view. It is key for Chinese asset managers to have strong understanding of global macroeconomic issues, not just domestic ones. In the past three years, macroeconomic issues elsewhere in the world caused problems in the Chinese equity and bond market. Heavy stimulus in America and Europe led to excess liquidity, much of which ended up in the Chinese equity market. This has caused market volatility and fears of asset bubbles.
Chi Lo, CEO, HFT Investment Management: We have a competitive edge because we have an international partner, BNP Paribas Investment Partners. Though this has made it easier for us to start, our challenge is now to build upon that existing expertise and grow.
Choy: We manage the Chinese assets for our joint venture partner and DWS Investments, a brand name of Deutsche Asset Management, distributes them though their Ucits funds. This means we do not have to go to Europe to promote our funds and for them the marketing story is so much stronger. Most of their fund managers are based in Frankfurt. They acknowledge it is impossible to manage a large domestic market like China effectively from there. China is incredibly challenging. When we first formed the joint venture, Deutsche Asset Management was restructuring its Asia business. We then had the opportunity not only to take on their assets in China, and emerging Asia, but also their track record and client base.
Lo: A common issue investors have is that Chinese asset managers lack a track record.
Rudd: The upside of not having a track record is not being constrained by past investment structures and performance. Asia’s growth opportunities are in the future, as opposed to the legacy growth that America, the UK or Europe builds on. Chinese asset managers are not stuck with legacy investment portfolios that were important ten years ago. Asian managers can go out, pick and choose how they want to grow and utilise new portfolios such as fundamentally weighted benchmarks rather than traditional market capitalisation weighted markets, for example.
Choy: We all have to manage our expectations of what we would consider a success. A lot of players in the asset management industry think size is what counts. Chinese asset managers could employ different strategies to expand and grow, both organically and inorganically. We should focus on being good at what we do, rather than just growing for the sake of growth. Otherwise, there is a risk of buying distressed assets. We cannot be all things to all people. We should decide what we want and where we want to be in five or ten
years time and then focus on the challenges and how to overcome them.
Funds Global: Chinese rating agencies did not get much attention from international investors until Dagong Global Credit Rating, in what many considered a bold move, first downgraded US sovereign debt in 2010. How established are China’s six rating agencies and how reliable is the research they produce?
Rudd: Chinese ratings agencies are still relatively unknown in China and, even more so, internationally. Investors find it difficult to assess their credibility and the quality of their research. We rely on our own credit rating process, which we have had in place since 2003, and rate over 1,500 companies in China. We provide that service directly to our clients investing in China. Particularly when researching small and mid cap companies, it is essential to have a team of analysts on the ground.
Lo: Researching China is different from the UK and America, even from Singapore and Hong Kong. The traditional Western model of researching and rating companies cannot be all applied in China, as there are some idiosyncratic characteristics in the Chinese market that Western analytical tools cannot be deployed.
Funds Global: Which pieces of new regulations affecting Hong Kong and the Asian investment fund industry as a whole are you currently most concerned about?
Choy: Hong Kong is the domicile of choice for us. It is the gateway to China and its regulatory framework is recongised all over the world as one of the best. Regulation is changing in Hong Kong as China opens up, most lately with the introduction of various schemes that facilitate the flow of renminbi from and to Hong Kong. Those include the Qualified Foreign Institutional Investor (QFII), the mini-QFII and the renminbi QFII schemes. In Hong Kong, we are more concerned with regulation that originates elsewhere, especially in the US. The Foreign Account Tax Compliance Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, especially the Volcker Rule, are some examples. Moving into markets such as the US will be a whole different game. With all the regulations coming in, not just from the US but also from Europe, the question is how we can be more proactive. The biggest challenge for most Chinese asset managers will be how to grow beyond Hong Kong.
Funds Global: What challenges do Chinese asset managers face when they move to Hong Kong?
Wang: Perhaps the biggest challenge is human capital. Much of the discussion centres on investment processes, investment philosophy, risk management and product development, but human capital is the most important factor. Human capital is not just about fund managers but also about distribution and sales staff. Developing a distribution channel requires time and resources, especially when Chinese asset managers want to compete with international asset managers that are established already. Chinese asset managers can bring their talent from China to Hong Kong, enter joint ventures with international asset managers or hire from their competitors. Attracting talent from competitors is difficult, as is moving staff from China and asking them to suddenly meet global standards. Despite a huge work force, not many are adequately qualified or have sufficient experience.
Choy: We all face challenges when it comes to recruiting because staff in Asia often lack skills and expertise to operate in global markets. We do want the best for our company but at the same time we are short on corporate history. Some will look at us and ask, ‘That is all you can manage? How are you going to survive? Are you going to grow?’ We have to show them, convince them, that we can grow and they can be part of that legacy. Anybody who is joining a Chinese asset manager, such as us, should do so because they want to be part of that legacy – a Chinese asset manager going regional and, perhaps, at some point global. I do not know if any of us are really going global but it’s about ambition and the vision that we can. If managers are just after better pay or higher bonuses, they are not right for us. We need managers who have a passion and who believe in their company’s work. Otherwise, it is just another job. Over the past ten years a lot of extremely talented Chinese professionals – not just from the asset management industry – have moved abroad. They now want to come back because they want to be part of that Chinese growth story.
Wang: Many Chinese professionals of my generation, who had moved abroad a decade or two ago, have indeed returned to their roots. Many of my former colleagues or friends from the World Bank, the International Monetary Fund or other major international companies are now back. China offers us a unique opportunity, possibly a once-in-a-lifetime opportunity. In terms of compensation, no doubt, there will be better opportunities elsewhere at international asset managers. In China, however, we could be part of something bigger. We could see Chinese asset managers going regional, global even. We could see the development of an Asian Ucits brand.
Gao: Chinese asset managers are aware of their strengths and weaknesses. We know it is hard to compete with the likes of BlackRock or Franklin Templeton Investments, but we believe we are the best when it comes to China-related investments. We know the Chinese market both from top-down and bottom-up. Most international asset managers can probably say the same about themselves, but which of them can say they are true experts on small and micro caps? International asset managers have global emerging market portfolios, managed by a global emerging market team. China is unique. It cannot be lumped together with other global emerging markets. International asset managers will claim they have local people on the ground. But how many? Some have only three or four people based in China. How many companies can they cover? It is easy to find people who know the global market and it is easy to find people who know the Chinese market well, but it is hard to find people who know both markets.
Funds Global: What business development plans do you have for Asia? How are you planning to attract foreign investors?
Rudd: We all have the ambition to distribute our funds outside China. What we are aiming at is to create products that are attractive to investors who want to raise their China exposure. On a global basis, China, even emerging markets as a whole, are still underrepresented. In order to distribute our funds outside China, however, we need to expand our distribution network channels, which will be expensive. Hong Kong has a distribution network that is primarily based on banks and asset managers affiliated with banks. Whereas in the UK, a network of independent financial advisers caters for the retail market. Both business models are fundamentally different and we cannot simply take one model and apply it to another country. Without a local partner, asset managers will have to build a distribution network from scratch. This can be both time-consuming and expensive. There are also certain products that might sell in one country, but not in another. In China, for example, we bring value-added products, such as high dividend funds, to the market. We have seen a lot of interest from international investors for institutional portfolios because they value a more personal relationship with fund managers. Building such relationships takes time and we also need to deliver the performance.
Gao: Outside Asia, our focus is on European clients. This is mainly a result of our partners’ connection. A lot of the growth is probably coming from high-net-worth individuals, family offices and wealth managers. We, too, have seen that many value the close personal contact with fund managers. This approach enables us to tailor our services to their needs but be cost effective at the same time. In terms of geographics, outside Europe, we see opportunities in America. There are few asset managers in the US that have direct exposure to China. Most have an emerging markets mandate and within that an Asian mandate. And China will be part of that. A lot of American investors have been telling us that Asia is now doing what the Japanese did in the 1960s, after which they spend more than a decade trying to crack the US market. Admittedly, Japanese asset managers are still struggling to sell their funds into the US. It is a difficult market and the regulators are getting more and more unfriendly. In the past year alone, we have seen a wave of new regulation that will make it difficult for foreign investors to establish themselves in the US.
Choy: I agree with what has been said before about the US market: it is a competitive market, with a lot of regulation about to fundamentally change the framework. On the other hand, we can learn from the US. For example, look at Matthews Asia, a San Francisco-based boutique, which has successfully invested in China and India. This does not mean we should all replicate this business model, but that asset managers need to find the right business model for a market.
Rudd: It is crucial to localise fund distribution both from an administrative and cost point of view. Hong Kong is attractive as a distribution hub.
Lo: The US as a market is huge. Whichever asset managers target the US, they will probably experience the same as the Japanese did in the 1960s and 1970s. The question is how much can they capitalise? Is it worth the cost and the efforts?
Choy: All Chinese asset managers will probably try to tap the US market sooner or later. Given the obstacles, however, we should first focus on product development and building a track record. Once we have established a track record, we can approach US investors with some facts rather than a story. Most investors have heard many stories in their career.
Wang: There is great potential for China. Its share of global economic growth is 9%, but less than 1% of asset management. Hong Kong will emerge as the regional hub for both international asset managers moving into China and Chinese asset managers expanding beyond their domestic market. Chinese asset managers coming to Hong Kong face several challenges. In our case it is because CSOP Asset Management is not recongised as a brand. Even though we are successful within China, not many people outside China have heard of us. We also lack a long-term track record. The distribution channel in Hong Kong is still dominated by commercial banks and without a long-term track record and brand recognition it is difficult to convince them to sell our funds. Another challenge is that we have yet to establish long-term relationships with consultants, such as Mercer, Ernst and Young, and PwC. International investors rely heavily on their advice and consultancy services, something we need to consider.
Rudd: A lot of the focus has been on Europe, but some of the emerging markets might be an important place in terms of opportunities. China has established international trade relationships with many of these emerging markets, most notably Malaysia, India, Brazil, Russia and Thailand. As emerging markets mature, their asset base will also increase. Whether they are the large emerging markets, such as Brazil, Russia and India, or less developed as in Africa, Chinese asset managers need to know how they develop and where potential opportunities are.
Funds Global: Do Ucits products add value for asset managers based in Asia?
Lo: Ucits funds do add value because they allow Asian asset managers to sell their products in various countries under one regulatory framework. The regulatory response to the eurozone crisis is something we are more concerned about than the levels of sovereign debt. The regulation originating in Europe, however, is nothing compared with that from the US. Their efforts have reached a point where they are strangling the asset management industry, making it especially hard for foreign players. China, on the other hand, is doing the opposite. China is opening up, liberalising, helping Chinese asset managers expand outside their home market as well as opening the market up for foreign asset managers.
Choy: DWS Investments, our joint venture in Germany, has helped us to sell our funds in the European market. They have also introduced institutional clients to us, which we could not have won on our own. Our sales people do not have to fly to Europe to do sales pitches for our funds because our funds are marketed under the DWS brand. In the next couple of years, we hope that Harvest Global Investments will emerge as a brand.
Funds Global: As competition steps up, what could Hong Kong regulators do to emerge as the region’s leading hub? How do you see Hong Kong as a final centre developing?
Lo: There is certainly competition from other domiciles, but that is a good thing. Hong Kong’s main competition is now with Shanghai, not so much with Singapore or Shenzhen.
Wang: One of the reasons why I personally chose Hong Kong over Shanghai when I returned from the US was that it is more liberal and more innovative. Hong Kong is a pilot site. It also has more free capital inflow and outflow. My vision is that Hong Kong will continue to grow, as will Asia. In 30 years’ time, the renminbi might even become a reserve currency. In the short-term, Hong Kong and Singapore will have similar roles. However, Hong Kong will have a competitive advantage because it is supported by China.
Rudd: Different financial centres will develop an expertise in different sectors. Asia’s financial markets have a huge potential for growth. There is no reason that there cannot be different financial centres.
Choy: Singapore has a bit of a competitive edge in the sense that international investors will always worry about the fact that Hong Kong is part of China. Expatriates have often said the standard of living is higher in Singapore, based on factors such as the health care system, international schooling for their children and quality of life. Many Chinese will still choose Hong Kong because it is closer to their roots, their heritage, and many believe in the Chinese growth story.
©2012 funds global