Hong Kong funds set for China push
Building distribution networks a huge challenge for fund houses to tap "game changer" opportunity arising from mutual recognition scheme
Hong Kong fund houses are bracing themselves for the challenge of building distribution networks to sell products on the mainland.
As reported last week by the South China Morning Post, Hong Kong and mainland regulators have spelled out the basis on which fund managers may sell their products in each other's markets. No launch date was announced.
Elvin Yu, the managing director and head of institutional business in Hong Kong for Allianz Global Investors, welcomed the mutual recognition scheme but said the criteria were too restrictive. To sell products on the mainland, a fund must be domiciled in Hong Kong and authorised by the Securities and Futures Commission, and its managers must be based in the city.
"The requirement for funds to be domiciled in Hong Kong will exclude a significant portion of SFC-authorised funds," Yu said.
Of the 1,700 or so funds authorised by the SFC, only about 300 are domiciled in the city.
Yu added that selling products to mainland investors and providing support services would be a challenge for foreign fund managers in terms of resources, especially when it came to using the wide distribution networks of state-owned banks.
Eleanor Wan Yuen-yung, the chief executive of BEA Union Investment Management, said fund companies were preparing for the "game changer" opportunity arising from the mutual recognition scheme.
"All our retail funds are Hong Kong-domiciled and they are being managed by fund managers here. We are well positioned to capture this opportunity," Wan said.
But she expressed concern that retail investors on the mainland might have little knowledge about foreign funds. "From my understanding, mainland investors are still very short-term in their approach. Fund retention is very short and therefore it is not easy to manage, particularly in current market volatilities."
The mainland's retail investors also appeared to have limited knowledge of offshore investment markets and the concept of diversification, and this would present a challenge for product development, Wan added.
King Au King-lun, the chief executive of BOCHK Asset Management, said the criteria for participating in the scheme were sensible.
"Having the approved funds domiciled and managed in Hong Kong will give the SFC direct oversight of all regulatory aspects of the management and operation of the funds. Another important consideration is that the assets of approved Hong Kong-domiciled funds will be governed by the city's law," Au said.
Finding the right distribution partners that could provide the necessary marketing support would be a top priority, he added.
"Our preference is to establish a bilateral distribution arrangement with our parent, Bank of China, for our respective products," Au said.
The chief executive of the Hong Kong Investment Funds Association, Sally Wong Chi-ming, said the mutual recognition scheme would be a "win-win" for mainland and Hong Kong investors. But education on both the investor and distributor levels would be the key to success.
On the mainland, mutual funds are primarily distributed by banks, especially the Big Five, and Wong said it would be important to ensure that the salespeople fully disclosed product features and warned investors of the potential risks.
"This is especially pertinent when you consider the scale, diversity and complexity of the mainland market," she said.