Hang Seng, HSBC may find RQFII products a challenge
Market flooded with underperforming ETFs and bond funds amid outflow of capital
Foreign banks could find it tough selling offshore yuan products based on their newly obtained investment quotas, underscoring the difficulty in differentiating products in a crowded market and attracting customers amid a continuing outflow of capital from the region, analysts say.
Global lenders, including HSBC and Hang Seng Bank, are set to issue RQFII (renminbi qualified foreign institutional investor) products in Hong Kong after becoming the first non-mainland institutions to win the licences.
HSBC said last week that it had obtained a quota of 800 million yuan (HK$1 billion) under the scheme, while Hang Seng had earlier gained 1 billion yuan.
HSBC will launch a fund to invest in the onshore bond market, while Hang Seng will issue an exchange-traded fund (ETF) tracking the mainland share market.
Market watchers say their products could find it difficult beating the already sluggish performance of some products issued by mainland competitors.
A sluggish macroeconomic environment due to concerns about the potential tapering of quantitative easing in the United States is also putting lenders under pressure to attract capital.
"Investors are increasingly savvy and mature - RQFII is still new and people need time to understand," said Sally Wong Chi-ming, the chief executive of the Hong Kong Investment Funds Association. "Investors no longer just focus on the upside, they also ask about the downside and risks. The A-share and interbank bond markets do have risks that we are not familiar with."
There has been a massive capital flight from RQFII ETF and fixed-income funds this year.
As much as 12 billion yuan flowed out of ETFs during the first nine months of this year, excluding net inflows to these funds on their first day of trading, according to Morningstar data.
As for fixed-income funds, 11 of 18 products targeting retail investors saw redemptions during the first half, reports show.
Five out of 14 bond funds targeting institutional investors also saw redemptions during the same period.
Besides capital outflow concerns, foreign banks may have lost out at the starting line in the ETF race since they are given smaller quotas than their mainland rivals.
For example, five of the eight ETFs issued by mainland companies are bigger than Hang Seng's 1 billion yuan product.
"In the ETF world, a bigger size usually means the funds will be faster in getting inflows to their products and thus are able to save a lot of costs," said Jackie Choy, an ETF strategist for Morningstar, who oversees the company's ETF research in Asia.
Choy said small ETFs could find it hard to attract institutional investors since many fund houses imposed limits on investing in small investment products.
Many money managers might not be able to invest in a product if the assets under management did not reach a particular level.
The RQFII scheme, part of the mainland's efforts to globalise its currency, allows offshore companies to invest yuan deposits in the country's equity and bond markets.
Official data shows 42 firms had received quotas by last month - 39 of them with mainland background.
"With more players joining the fray, competition will intensify," Wong said. "But the pie is growing rapidly and what is important is for fund managers to show they are best-in-class."