Global ambitions

Peng ChoyHarvest Global Investments should become a global brand, says its chief executive Peng Wah Choy. Stefanie Eschenbacher finds out more about his plans to co-brand funds it sub-advises for Deutsche Bank.

Sitting on the 49th Terrace of The American Club in Hong Kong, Harvest Global Investments’ chief executive officer Peng Wah Choy reveals his plans to promote the Harvest brand beyond Asia.

Harvest Global Investors is a fully-owned subsidiary of Harvest Fund Management, one of China's largest Sino-foreign joint venture asset management companies, in which Deutsche Asset & Wealth Management has a 30% stake.

Harvest Global Investors has benefited from Deutsche’s distribution network in Europe; but Singapore-born Choy, who joined in February 2011 from Fullerton Fund Management, where he was deputy chief executive officer, has global ambitions.

“The next step will be to develop some co-branded products which we sub-advise for Deutsche distribution,” Choy says, adding that he is already in discussions with them. “We are hoping to have some co-branded products some time next year.”

Choy says China-centric products are likely to be co-branded first, rather than broader emerging Asia funds.

Some of his peers have launched Ucits funds in Luxembourg and Dublin, but struggled to attract assets. European investors tend to prefer established brands with a track record and a rating from one of the major agencies.

“My Chinese parentage peers have proven how challenging it is to promote a Chinese brand in Europe and be successful,” Choy says. “There is not much of a differentiation.”

Though Choy says investors are increasingly paying attention to the sub-advisor of funds, especially when it comes to China-related investments. “Co-branding will be the next step, but not the last one,” he says.

Investors may even ask for a “pure Harvest” fund, which would put him in direct competition with its joint venture partner. At the moment, the distribution agreement means that Choy has little control over the distribution of products and his fee margins are low.

Choy says no other region is compelling enough to sign another distribution agreement. In Latin America, neither Brazil nor Chile offer him enough of an incentive when it comes to demand for China-centric products; South Africa and the rest of the sub-Saharan Africa are too small.

In the US, though, the situation is different. “The Deutsche Bank brand is still a little ahead of Harvest, but it is no household name,” he says.

The Chinese parent, Harvest Fund Management, has recently launched Harvest Krane, a joint venture between Harvest Global Investments and Krane Capital.

This distribution joint venture will distribute China and Asia-focused funds to institutional and retail investors in the US.

Harvest Global Investments was one of the first subsidiaries of a Chinese asset manager to get a qualified foreign institutional investor (QFII) licence. The licence allows foreign investors to buy A-Shares listed in Shanghai and Shenzhen.

Its first renminbi qualified foreign institutional investor (RQFII) fund, the Harvest RMB Fixed Income fund, launched in February last year. Another allocation of RQFII quota was granted in July to launch a China A-shares mutual fund in Hong Kong.

And since the RQFII scheme took off a year ago, it has also launched two exchange traded funds (ETFs).

Asset managers had high hopes in the RQFII scheme, which allows foreign investors to tap into the rapidly-growing pool of offshore renminbi and invest it into the Chinese
A-shares market.

Even though synthetic ETFs tracking Chinese A-shares have been around for some time, RQFII ETFs allow physical replication.

In October, the Harvest MSCI China A Index ETF was the last one in the first round of RQFII ETF launches that involved four asset managers.

It is one of the two asset managers with two such products, having launched the Harvest MSCI China A 50 Index ETF in July.

“Mediocre at best,” says Choy of the success of the RQFII ETFs. Both his ETFs have gathered about $200 million each, but Choy says only 3 billion renminbi ($0.5 billion) out of 7 billion renminbi in quota have been used.

Investors remain cautious over the Chinese economy, which has been plagued by weak growth and liquidity problems. China also recently saw a leadership change. And
the poor performance of the A-shares market has made the China growth story harder to sell.

“Investors will stay away until the A-shares market stabilises,” Choy says. “Given that these ETFs are beta trackers, most of them have performed in line with the market, but the market is down.”

Still, he says he is confident about the long-term prospects. “We partnered with MSCI knowing that in the short-term it will not be the easiest, but we are positioning ourselves for the inclusion of China in the MSCI Global Emerging Market Index, which we hope will materialise by 2015.”

MSCI has recently started to review the A-shares market for potential inclusion in the emerging market index, something that has so far been hindered by the quota scheme and a lack of clarity on taxation rules.

The inclusion of China in the benchmark should attract interest from investors who reference to the benchmark.

Only about 60% of the 50 billion renminbi scheme have been utilised, Choy adds. Several ETFs have also suffered redemptions.

The scheme has so far been the domain of a handful of Hong Kong-based subsidiaries of Chinese asset managers. This, however, is starting to change.

“The RQFII scheme is like an exclusive membership club that is suddenly opening up to everybody else,” Choy says.

Although QFII was introduced more than ten years ago, Hong Kong-based subsidiaries of Chinese asset managers have had an “exclusive member club”-like opportunity with RQFII for the past two years.

Since June, fund management companies with a significant business presence in Hong Kong qualified to apply for an RQFII licence and quota.

Choy says: “Are the Chinese ready for the competition? Honestly, I do not think so. Most of us launched one round, maybe two rounds, of products, all of them in Hong Kong.”

Choy says he and his peers have struggled to gain a competitive edge in difficult conditions, but they now face more competition.

“A lot of Chinese fund managers have set up in Hong Kong, but how many are truly competitive? I do not feel that the market has supply for so many of us.”

Choy adds many are so China-centric that all their fortunes lie in products investing in one single market.

“As much as we are China-centric, RQFII is just 25% of our business, but for some of our peers the share is 100%,” he says.

“If tomorrow RQFII becomes so competitive that we would be unable to compete, we would have other areas to focus on: Asian equities, Asian fixed income and our alternatives platform.”

Choy also highlights that there is always a risk of the Chinese regulators, which have provided asset managers with this “gift” – as the RQFII scheme is known in Hong Kong’s asset management circles – taking it away. With the most recent announcements that Singapore and London will be the next RQFII centres, his fears seem to be materialising.

©2013 funds global asia

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