Summer 2013

INTERVIEW: Boosting the home bias

28-29-John-LeeThe Hospital Authority Provident Fund Scheme of Hong Kong is now looking to real estate investment trusts and more local investments to beat inflation. Chairman John Lee talks to Stefanie Eschenbacher.

Hong Kong’s second-largest private pension fund, the Hospital Authority Provident Fund Scheme, is increasing its home bias and considering real estate investment trusts (Reits).

The scheme has already increased its allocation to domestic equities, issued a dim sum bond mandate and plans to further increase its renminbi qualified foreign institutional investor (QFII) quota.

John Lee, the chairman, says these changes were driven by members of the scheme, for whom the involvement in investment decisions is an important aspect.

The scheme’s ultimate aim is to beat inflation, which has also led its members to consider investing in Reits.

“Global markets change quickly,” Lee says. “Now we are looking into Reits.”

Lee says global Reits are being considered. Reits would form part of the alternatives mandate and it is likely that the allocation to hedge funds will decrease as a result.

“Hedge fund returns have not really been that impressive, and regulation slowed down the growth in hedge funds,” Lee says of the reluctance to allocate more to hedge funds.

Governments in Asia, he adds, are doing a lot to dampen the real estate market, which many fear is overheating. “Real estate, in the longer term, is a hedge against inflation and will give us returns.”

Lee says the primary target is to beat inflation, and another way to do so is to allocate more locally.

The equity home bias has increased from 20% to 25% in recent years, a decision that was partly driven by an expectation that local inflation will rise faster than in other countries, especially those in the West.

He says China-related investments account for a large part of this change.

“As the Chinese market develops, it opens up opportunities for us.”

Most the scheme’s 25 managers are established, international players but, John Lee says, as opportunities in Hong Kong and China are emerging, local specialists are increasingly being considered.

The Hospital Authority Provident Fund Scheme states it is Hong Kong’s first and, to date, only retirement scheme to be awarded a $100 million qualified foreign institutional investor (QFII) quota.  

Of this, $70 million have been invested in equities, managed by China Asset Management Company, and the balance in renminbi-denominated bonds, managed by Manulife Asset Management.

Lee says it is likely the quota will increase further. “We would like to increase the quota, even though the A-shares market has not performed well.”  

China’s economy has been growing at close to double-digit rates, but it was the worst-performing major Asian stockmarket last year.

Still, Lee says investing in the A-shares is a good way to diversify the portfolio because those have shown lower correlation with other investments.

Part of the hesitation to allocate even more to Chinese A-shares is uncertainty around taxation of profits of China-related investments. Investors currently pay a 10% tax on profits of investments in China.

“The Chinese government has not made any indication if this tax will be kept at 10%, rise or fall,” Lee says.

“Once there is more clarity it will be easier for us to make such decisions.”

Lee says a range of tools that could be used to hedge inflation have also been studied, and may be introduced into the portfolio.

In uncertain times, he says his members feel more comfortable if liabilities are denominated in Hong Kong dollars.

Not only was the Hospital Authority Provident Fund Scheme the first retirement plan to be awarded a QFII quota, Lee says it was also the first one to give out a dim sum bond mandate.

An extension of the short-term bond investment in Hong Kong dollars, dim sum bonds is a small position of the overall portfolio. It has a short-term maturity.

Lee says the investment opportunities in the dim sum bond market are not exciting, at least not when compared with other asset classes. Yields remain low and the market is tiny, compared with China’s onshore bond market. Though he says it makes sense to hold them for diversification purposes.

“The quality of these companies still needs to be decided,” he says of dim sum bond issuers.

“A lot of them are unrated and even with those that are rated, it is difficult to see how they deserve a rating.”

The majority of dim sum bonds have a three to five-year maturity, with few issuances above that. “Everyone speculates interest rates will go up,” he says.

Over the medium to long-term, Lee says it is likely the dim sum bond market will grow as more international companies issue dim sum bonds.

When it comes to the US and Japan, the Hospital Authority Provident Fund Scheme employs passive strategies.

“Japan is a difficult market,” Lee says. “The passive approach suits us better.

We hedged currency movements so we were lucky. We always look at macroeconomic factors also.”

The US is a good market but “too efficient” to justify an active approach, Lee adds. The Hospital Authority Provident Fund Scheme uses customised benchmarks and managers are reviewed regularly.

Over the past couple of years, four managers were removed because they had underperformed for two to three years.

“We are patient,” says Lee. “But we also have tight controls on how we invest.”

©2013 funds global asia

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