Our line-up of experts in Hong Kong considers the importance of fixed income ETFs, sustainability and the prospects of increasing China in the indices. Chaired by Romil Patel.
(Managing director, ETF, Haitong International Asset Management)Sean Cunningham
(Head of Asia ETFs, JP Morgan Asset Management)Heidi Cai
(head of ETF, indexing and smart beta, North Asia, Amundi)Mohamed M’Rabti
(Deputy head of capital markets, Euroclear)Connie Chan
(Head of iShares asset management distribution, Asia ex-Japan, BlackRock)Carmen Cheung
(Head of ETF, Samsung Asset Management Hong Kong)Xiaolin Chen
(Managing director & head of international, KraneShares)
Funds Global – Where are you seeing interesting structural growth stories in Hong Kong and Asia-Pacific, and what is your strategy for tapping into long-term structural growth developments?
Connie Chan, BlackRock –
Exchange-traded funds (ETFs) are becoming a more important tool to implement active decisions in portfolios by all types of investors, be they institutional, wealth or individual investors. We see two trends: increased client usage, first in fixed income ETFs across Asia-Pacific, and secondly, growing interest on sustainability.
2020 was a turning point for global client adoption of fixed income ETFs and fixed income iShares. The inflow was US$89 billion, and we estimate that over 100 asset managers and asset owners globally were first-time adopters in 2020 for fixed income ETFs, and 80% of our top active managers are now using our fixed income ETFs too. The iShares fixed income is now a $690 billion business and we continue to believe that it will grow to $1 trillion over the next two to three years.
Sustainable iShares ETFs saw a record $47 billion of net inflow in 2020, breaking the record again, and assets under management (AuM) have tripled year-over-year (YoY) to $82 billion. We have 140 iShares sustainable ETFs and index funds globally, we have the broadest choice of any firm, and our goal is to continue innovating so that more investors, people and savers can have greater access to sustainable strategies.
Sean Cunningham, JP Morgan Asset Management (JPMAM) –
Asia has an interesting nuance where you have your local platform, so you have ETFs that are listed on the Hong Kong Stock Exchange, in Japan and Australia. There’s also a really big book of business that actually trades offshore, so either into the US or Europe. Asian institutions have gotten particularly familiar with using those vehicles listed in other jurisdictions to get their liquidity, and sometimes because that’s where they find bigger blocks of liquidity because of the evolution of those markets.
What’s been interesting over the last year is that we’ve continued to see this phenomenal growth across the market in general. That’s global and has translated into flows in Asia, which is positive and has continued to grow like that offshore book of business. There have been some interesting trends, including fixed income and sustainability themes.
Fixed income has been a trend for a number of years now, but it continues to impress, and it also has more space to run in ETFs than the equities piece. Sustainability has been the big theme because we’ve been talking about it for years and few have historically put a lot of money to work. Then all of a sudden, people are starting to put money to work in it – that was a big theme last year.
When you look at the market, China’s the area that everyone has to focus on and then you’ve also got to figure out what your onshore strategy is, if you’re going to be locally listing and then what your strategy is around pointing clients to pools of liquidity offshore. We don’t have any locally listed ETFs outside of China, we locally list in China but apart from that, we don’t have any locally domiciled ETFs at JP Morgan at the moment.
Mohamed M’Rabti, Euroclear –
There’s a lot of Asian investors investing in funds in Europe and the US, and we have been working with the market to see how we can cross-list some Ucits ETFs. We have seen a lot of Asian investors investing in ETFs in Asia, but also outside Asia. We have also identified some challenges in cross-listing certain Ucits ETFs in Asia, and there could be an opportunity there. Why now? The range of locally listed ETFs on the Hong Kong Exchange is limited while many are Ucits ETFs available in Europe. Furthermore, we have recently seen a lot of ESG ETFs issued in Europe which could be a benefit for the region. By cross-listing them, we could also bring similar spreads to this market, like we see in Europe.
In the past, there were discussions about the challenges of retail because it was small, but following the Covid-19 pandemic, retail appetite is growing and education is happening, so there might be some opportunities for cross-listing Ucits ETFs in Hong Kong, and also for the Hong Kong exchange to become the hub for the region.
Heidi Cai, Amundi –
As others have mentioned, there is definitely a growing structural trend for ESG in Asia. It’s widely accepted that Europe has been at the forefront of ESG adoption and Amundi has been working with investors on sustainable investment for a long time. This history means we have expertise in developing sustainable ETFs within a sophisticated regulatory environment and for a wide range of investors. There is no one-size-fits-all solution when it comes to ESG investing.
We are pleased to see the trend starting in Asia, as such a sizeable and important market there is a real opportunity to support change through the adoption of sustainable investing. I would say that nowadays, almost 100% of my conversations involve ESG and sustainability. We are happy to see those structural changes in Asia, and Amundi is here to help the Asian investors to embrace this trend of sustainability and ESG investment.
Johnnie Yung, Haitong International Securities –
We just launched the first broad-based ESG ETF in Hong Kong – basically, it’s the China A-shares story. Over the past two years, we’ve seen quite a bit of change in the market, especially with the trade war, the pandemic, we even witnessed the first negative oil price and all the central governments racing for quantitative easings. All these changes are exceptional, but because of this, people now realise that they have to focus on sustainability, not just on climate change, but also whether the company can be sustainable in the future – for instance, whether their supply chain is flexible, whether they can adapt to the future and whether they have the capacity to withstand unforeseen risks. All of these things bode well for people to wake up, and I think this is the turning point for ESG investing.
The advantage of being in Hong Kong, or in this region, is we can access the China A story quite easily, either through Stock Connect, cross-listing into China or China cross-listing into Hong Kong. This could bring opportunities for Hong Kong to become the ESG hub for Asia, so other parts of the world can access the local ESG products through here and vice versa.
Xiaolin Chen, KraneShares –
KraneShares is solely focused on providing China solutions and China solutions in ETFs itself. We have been very lucky and fortunate to get involved with a lot of our clients’ conversations directly and engage China as an asset class in equity, fixed income or in core ESG. Similar to China equity and fixed income, you’ve got to start from step one of the broader indices and consider these particular investments in their global indices, hence a lot of major asset managers will start looking at these particular investments. Broadly speaking, investors have a benchmark or a reference to check on how they would look at China or ESG holistically in Asia.
When it comes to ESG, most people naturally think they have to compromise on performance, but it’s not always true in all markets. Our China ESG leaders fund takes all the share classes listed onshore offshore as long as it’s Chinese companies, and they give a cut on the top leaders in the ESG space. They outperform the broader benchmark by 60% to 70%.
Today you’ve got to have more participants, and particularly good index providers to continue to participate in this asset class, take the leadership, continue to drive the core automatic index construction or index-building to include this theme into their broader indices.
ESG does not compromise performance – ESG is outperforming the broader benchmark and it just needs to get to the right part of the curve into the ESG per se in the investing. Europe is the biggest region of ESG investing and dominates 60% of that AuM and flows, so it is true that the majority of ESG investors are domiciled in Europe. That being said, it’s also concentrated in certain markets, but it’s really going to lead that effort to make global investors more aware of the toolkit available.
Carmen Cheung, Samsung Asset Management Hong Kong –
We do quite a lot of retail distribution in the region together with our headquarters in Korea. For retail investors, it’s still early days for them to understand what ESG is, so this requires education and we’re happy to see market participants putting resources into this, effectively promoting the awareness around this important topic. Having said that, our headquarters in South Korea is setting up an ESG committee team within Samsung. It’s a very important asset class, so this is something we are going to look for, and then we actually hope that the more sophisticated retail investors will understand the importance of the ESG concept in the region.