Changes to regulation, US-Sino trade tensions and further steps by China to open its capital markets were some of the topics discussed by our panel. Chaired by Romil Patel in Hong Kong.
(deputy chief executive officer – Asia-Pacific, BNP Paribas Asset Management)Peng Fei
(chief investment officer, Wanwei Asset Management)Karen Liang
(head of relationship management, Caceis Investor Services, Hong Kong)Alessandro Silvestro
(managing director – Asia-Pacific, Lemanik Asset Management)
Funds Global – Which asset classes and markets in Asia performed particularly well in 2018?
Karen Liang, Caceis –
There are three obvious trends. One is Asian equity, the second is the illiquid assets and the third is linked to the government. Many people may agree that equity is still a favoured choice of investment in Asia, despite recent relative performance worsening since China began the exchange depreciation amid the trade war with the US. Asian equity was significantly outperforming emerging stocks from January until mid-June.
A favourite tale of investment allocation in recent years is the investment in illiquid assets, such as real estate funds, private equity and infrastructure funds. This is due to a high demand from institutional investors around the world because these asset classes can offer the relatively high profit with the relatively low volatility investment, provided that the investor can tolerate the illiquid nature of this asset class. According to the latest figures, the Asia-Pacific private equity deal value is up 41% from 2016.
The third interesting point that is the government is increasingly looking for private sectors to contribute to the real economy, like the public-private partnership (PPP) scheme of the Belt and Road Initiative (BRI). This actually encouraged private equity further.
Rakesh Vengayil, BNP Paribas –
Asia has been generally hit by the concerns over the trade wars and US dollar strengthening, and the bulk of the impacts are from a foreign investment perspective. Furthermore, the region is affected by the general investor sentiment due to the emerging market characterisation. As a result we are seeing this spilling into single-country asset classes like India, Indonesia, developing and emerging markets.
From our perspective, there are still some unique opportunities coming up because in a volatile situation like this, institutional investors are looking for solutions. If you have a broad range of asset classes and solutions to offer, you are better positioned to provide the desired outcomes for the client’s portfolios.
Peng Fei, Wanwei Asset Management –
The attractive assets in terms of the past performance in China include government bonds, especially the long-duration government bonds in China. Nobody really talked about these assets in 2018, but they have performed very well compared with the equity markets in Asia and China.
China bonds performed terribly in 2017, but in 2018 the government bonds had a good turnaround.
Another asset is private equity, which was very hot in China in 2018, and some retail investors have been chasing the Unicom type of projects. They do not care about the valuation, they just jump in. There are a lot of emerging venture capitals in China that have lots of resources and they are looking for the very early projects to provide some early liquidity. Some of them are in very innovative areas like application of artificial intelligence (AI), blockchain and energy-efficient projects. In China, a lot more money is going into these areas.
The third one is hedge fund products in China. Compared with developed markets, China is much less mature in terms of high participation from retail investors, so we see lots of inefficiency and irrationality here. There are very good arbitrage opportunities for some strategies, such as arbitrage between the equity cash market and the future market, and some CTA [commodity trading adviser] strategies as well. Our company has an industry-leading absolute return arbitrage strategy, which delivered about 13% annualised return in 2018, with almost every month around 1%, which is very stable.
For other Asian countries, Japan has done very well compared to others. Japan can be a safe haven because of tensions between China and the US. To mitigate the trade war impact, China also wants to keep good relationships with other trading partners such as Japan, so you can see lots of good things are happening there.
Alessandro Silvestro, Lemanik Asset Management –
We are in a high-volatility environment and Asian stocks have not been the greatest. I would say that venture capitalists and private equity investment are probably the ones that have had the largest growth and the largest fundraising.
Funds Global – What regulations are having the most impact on your business?
Being a European asset manager, definitely the MiFID regulatory policy from Europe, because we do have investment centres here and we sell European products in Asian markets, so that is where the fallout is.
The significant one, being in Hong Kong, is FMCC – a new Fund Manager Code of Conduct which has been introduced, so a lot of asset managers operating here have been trying to comply with that.
Another key regional one is in India, where the regulator has finally decided to completely abolish the upfront fee. I think that is going to have a major recalibration in the way the distribution is done in the Indian market.
This is not strictly regulation, but with Hong Kong and Singapore’s new fund structure, OFC [open-ended fund companies] and VCC [variable capital company], Hong Kong, Singapore and Australia are being positioned as the major fund domiciled Asian centre. We need to see how it will play out, but it is a welcome change for us.
Finally, back to your robo-adviser, it is interesting to see some of the regulators in the region responding to the new changes. Taiwan, for example, has amended its regulation to allow robo-advisory. In Hong Kong and Singapore, there has been an amendment to allow virtual client onboarding, so you can do non-face-to-face client onboarding, which was not possible in the past. That is another interesting trend that we are seeing – where regulators are responding to new innovative trends which are happening worldwide.
We have seen lots of regulation changes in China. As I do business in China, my company is directly affected in two ways, one good and one bad. China has three regulators: the China Securities Regulatory Commission (CSRC), the China Banking Regulatory Commission (CBRC), and the China Insurance Regulatory Commission (CIRC). The last two were combined together recently. They all have applied tighter regulations, so it affects business in banks, mutual funds, insurance companies, as well as hedge funds and private funds. It should be very difficult to sell products in the same way as before.
Because of those negative impacts on company’s growth and profit margin, financial companies have to be creative to keep their clients and maintain growth, so they need to find new ways of marketing and to serve their clients. Fintech is one choice, and that is the push directly from the top; many companies are thinking either they do it internally or they outsource to companies like us. This year we have started serving some very large financial institutions and we see the interest is growing.
We are also headquartered in Europe. As you know, our business is to help clients willing to ‘go global’ with a Ucits or AIF Fund by providing management company services. There is a new CSSF circular 18/698 that forces [Luxembourg-domiciled] management companies to have the ‘right’ amount of substance. Regulators scrutinise much more closely nowadays. Ten years ago, you did not need any substance in Europe, then regulation changed after [Bernard] Madoff and the global financial crisis. Initially it was okay to have only three people on board, so maybe a compliance officer, a secretary and a fund manager. With the new regulation, which is 150 pages long, you probably need over ten people to run your shop. Obviously, depending on the assets under management (AuM), number of sub-funds etc, it can go up. Regulators want to see substance, oversight, strong risk management function and expertise. We have 80 people focused on that area of business.
In terms of regulation, interestingly some of them are leading a positive impact for us, being a service provider, because bringing on higher skill and capacity is essential in order to cope with compliance.
Funds Global – We are seeing regulation coming in China that is going to make the wealth managers register with the banking regulator, as opposed to the asset management regulator, for distribution of products. Is that going to change the distribution landscape in China, given the fear of arbitrage between the regulators?
That has always confused me because the three regulators have different policies and are sometimes not very consistent. Companies under different regulators are doing similar business, but because of different policies, they can do it in different ways. As far as I know, the CSRC has not approved any new licence for distributing financial products in the past one year, but for the banking regulator, they are making some progress. In China, the banking distributors are the major distributors for the wealth management products, and they cover most of the retail investors. Building relationship with these wealth managers registered with the banking regulator will be our top priority.
The significant change is the fact that the China Banking and Insurance Regulatory Commission is now saying that if you are dealing with wealth management products, it has to be organised as a separate subsidiary under the bank.
That means there is a parallel asset management product offering under the banking regulation. People are speculating about the scope of that, but essentially it will produce something equal to an FMC and a trustee combined together. If that happens, the banks, which are today distributors for traditional mutual fund products, may start focusing on their own wealth management products.
If you look at the real underlying intention of the regulators, they are pushing everyone to be a bit more traditional asset management-oriented. As a foreign asset manager, it is good for us because there is opportunity on both sides if you are collaborating with a local provider, but just watch this space to see how it plays out.
Funds Global – Environmental and social governance (ESG) investing is a hot topic around the world. How is this playing out in Asia, and what needs to be done in the space?
We are clearly seeing a significant pick-up in activity in the last year or two, with more and more signatories of the UN Principles for Responsible Investment (PRI) across the region. We have seen how this can be a powerful driver, like in Japan since Government Pension Investment Fund (GPIF) signed the PRI in 2015. When a large asset owner in the region takes a position, the market feels a natural tendency to align itself to that, and that is what we have seen. We are also seeing other drivers in terms of regulatory changes. A specific example would be in China, where the government is planning to make disclosure of certain environmental key performance indicators (KPIs) for listed companies mandatory.
You used ‘KPI’, I have also heard ‘green certificate’ being used. Companies have a task to finish and use up a certain amount of these certificates. If they can do it by themselves that is fine, if not they go to market to buy.
You can see the trend. You are seeing a plethora of regional initiatives, such as the Hong Kong Green Finance Association (HKGFA), which was recently launched. While there is a pick-up in a lot of initiatives and discussions around ESG, actual action and allocations are yet to pick up.
We feel the reason for that is low awareness – especially among the retail investors. There are a lot of acronyms being thrown around – SRI, ESG, CSR. The market’s awareness and education is still being enhanced today. Even with asset owners, the large institutional investors are already in play, but a lot more education is required, so that is what we are doing.
Overall, a lot of asset owners and institutional clients are starting to hardwire ESG into their investment guidelines, so that is one of the drivers.
People are also keeping a watch on millennials as they care about environmental social issues. It is no longer just a moral or principled view, there is also a commercial aspect, because long term, if you want a risk-adjusted return, sustainable investments have the potential to generate that.
What we see now is that requests for proposals (RFPs) ask about your ESG policies. It is no longer just a ‘nice to have’ – if you want to stay relevant, especially in this part of the world, you need to have this kind of policy and adapt. Obviously, it needs to make sense from a commercial point of view, but it is a must-have, or should be implemented soon.
I agree, because many of us believe that Asian investors have a very limited knowledge and lack of resources regarding ESG investing. Moreover, private investors in Asia traditionally think social responsibility and investment are two different things and ESG could negatively impact their investment return. But being a French bank, we can easily understand the difference, because France has been very active in ESG for many years. For example, the French labour union will only allow investment into a company that pays attention to socially responsible factors such as employee care.
When it comes to China itself, I do not see much progress on the S and the G, but for E, I have seen a lot, it is a direct response to the central government’s agenda. We have seen some mutual funds launching products, they called it ESG but I think it is mainly on the E side. We see the industry has released new policies to encourage people to use green [energy].
Funds Global – Little is really known about China’s efforts in renewables in the West, and they are not very well publicised. What are you doing to raise awareness?
In the last two years, we have seen people being recognised for making efforts in this space, so almost all the awards which the asset management industry has include a special category for responsible investment, sustainable investment and ESG. That is a good start to motivate asset managers, and collectively asset managers can influence corporations and that is how change takes place. In Asia we can sometimes lag behind, but once the region starts changing, things happen fast, and that is what we are hoping for.
Funds Global – The US share of the global economy has been steadily declining and the Made in China 2025 Plan has been a source of tension with the US and led to a trade war between the world’s two largest economies. How do you see this impacting the region and how can fund managers capitalise on a shift in economic power from West to East?
If we look at the numbers, we saw an increase, not a decrease, in imports and exports numbers, so in the short run we do not see direct impacts. But the GDP number went down.
Investors are very fearful of tensions between the US and China and are taking a very defensive position, so that is not good for the capital market. For the economy, remember that the US is still a large trade partner but not in a dominant position, so China is increasing trading relationships with other countries, especially with neighbours in eastern Asia, Japan and Europe. In terms of trade, China has many ways to diversify the risks and to mitigate the impact.
But the tension is not only about trade, it is just a tool, or an excuse. The risk China has seen is from the event of ZTE [Zhongxingxin Telecom Equipment] being fined by US. The Chinese government realised that a lot of critical technology still relies on Western supplies, so that is why we saw a lot of government initiatives in 2018. For example, they sponsored a number of technology projects and innovations.
It is not just China and the US that have been impacted. Those regional economies that have larger exposure to the US market via China in the global supply chain will be hurt more by the US tariffs. Clearly, asset allocation implications from this are to avoid those countries/sectors/industries that will bear the brunt of the trade impact and focus on those that will not be affected as much or even benefit.
This is actually a great opportunity for Europe. In the first six months of the year, there was nearly $20 billion in foreign direct investment (FDI) from China to Europe (M&A) compared to only $2 billion to North America, according to Baker Mackenzie.
The Chinese are investing nine times more in Europe than in North America. In return, cash-rich European insurers and pension funds are ready to invest in infrastructure, venture capital and private equity in China and the region. As they want long-term investments, this is the right route, especially as there is a lot of innovation and developments in this part of the world.
The capital raised by China-based private equity funds has increased more than tenfold from 2007, reaching $64 billion in 2017. Last year, China even overtook the UK to become the second-largest private equity fundraising market in the world. One common factor worth noticing is that many of these funds obtained the majority of their funding either from government agencies or large corporate investors with ties to the Chinese government. But would participation in this private equity only be limited to Chinese players?
Funds Global – China is taking further steps to open its capital markets after granting a foreign bank [Standard Chartered] a licence to provide custody services to Chinese funds and asset managers in the country. How big a step is this and what other reforms do you expect to see?
None of us know what exactly the scope is yet, but it is welcoming news on the securities servicing side. China is one of the important, attractive and strategic markets in the region.
We have been operating in the market for more than a decade now and have had a joint venture, participated in the Qualified Foreign Institutional Investor (QFII) scheme, the Renminbi Qualified Foreign Institutional Investor (RQFII) programme, Stock Connect, Bond Connect and now the Wholly Foreign-Owned Enterprise (WFOE). The evolution has been supported by methodical capital market reforms. China is letting foreign investors know that they are welcome.
Ten years ago, we never thought that we could have a 100%-owned entity in China, but today the 100% WFOE can launch essentially a Qualified Domestic Limited Partnership (QDLP), which allows us to bring our global capabilities to the Chinese market. The general direction of foreign institutions being welcome to participate in the Chinese market is very encouraging. Having said that, it is just the beginning of fundamental change. China is the market that is too big to be ignored for foreign asset managers. It is a long-term story and you need to have the patience, temperament and agility to respond to that.
If you look at the global custodians, the top four are all Americans. Ironically it is a UK bank which is relatively small, at the ‘global custodian’ level, but it is a very strong local custodian in this part of the world.
That is precisely my point because the Chinese authorities and regulators always welcome people who are long-term, so when they give a certain licence, they look at how committed the applicant is to the market and the substance that has been put on the ground. They take a holistic view and not simply at what one business line is doing. That is where some of these unexpected players getting certain favourable decisions, it is not an accident but part of a design of long-term commitment and substance on the ground.
Funds Global – How do you see the cross-border China, Hong Kong, London Connects and the mutual recognition of funds (MRF) increasing the asset flows in the region and internationally?
This is a very good initiative to get international exposure. Hong Kong and China are trying to position themselves as an alternative and they try to do regional and global cross-regional MRF. That is all good, but the challenge is: why would you use that channel when you can already use Ucits, which can be passported all over the world? Why should I just limit myself to four countries when you have something like Ucits or AIF [alternative investment funds] which have been successful for 30 years?
Ucits and AIF cover so many more countries and regions, including Latin America, the Middle East and Asia, that they definitely have the edge today.
If China, especially on the northbound investment, starts to get bigger, then yes, flows will massively increase in the region; because right now, Ucits are not able to crack China unless you have a QDI onshore licence. If China’s investors can really invest into UK or Hong Kong funds, then absolutely, it is going to be fantastic.
The way I see it is that China always does allow things to happen in a controlled, methodical way, and today they are incrementally allowing foreign money to come into the country. The first scheme of MRF was with Hong Kong – it had its own constraints, but I assume the future ones will come with fewer constraints.
The inclusion of Asia into the MSCI index is expected to bring an additional estimated flow of $300-400 billion into the market. There are a lot of things in the pipeline and it is going to be done in a very planned, calculated manner, but eventually I am sure we will see the flows.
I have the consistent view on these matters of QFII, RQFII, QDII and the Connect between China and Hong Kong or China and London: all these are channels, methods, vehicles, not the underlying targets. In order to stimulate cross border flows, the underlying assets need to be attractive enough, for example they are cheap with high quality. We can see the Hong Kong market is not that deep now. There are a few good companies, but not enough, so it needs more inclusion of high-quality companies in order to attract long-term capital flowing from outside. The same logic can be applied to London and countries in Europe, if the assets there are cheap and good enough, people will definitely buy.
Funds Global – What are your expectations for investments in Asia going into 2019?
I think that private equity, technology and fintech will have great impact in 2019, especially on the banking side. Fintech now wants to embrace banks, and they can provide support in having more efficient payment, or investments, or FX. All of these will be a great investment for 2019 and will be performing well, and on the lending side too.
The Asian market is getting much more sophisticated and with technology coming into play, it is no longer just traditional plain vanilla asset allocation and equity fixed income. A lot of discussions today are increasingly becoming very outcome-based, especially if you look at insurance clients, it is asset liability management. They are seeking an outcome and a solution, such as multi-asset, smart beta and all those things. If you are a product pusher, you need to worry, if you are a solution provider, you can be optimistic. At the end of the day all, these clients have to invest somewhere and some of these are strategic allocations, so investments will still be there even if you do not have the right solution to offer.
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