Fund managers hail Hong Kong product reform but expect slow progress
Proposed law change will allow open-ended corporate structure to enhance flexibility but industry players expect progress to be slow
Fund managers welcome a proposed law change that will make it easier to launch fund products in Hong Kong, while conceding it may take time for the changes to bed down in the market.
On Thursday, the government proposed a change to the company law that will allow open-ended investment funds modelled on a company structure. This format is common overseas, but Hong Kong lags its peers in allowing a fund structure that provides ease and flexibility for investors.
At present, funds must be set up as trusts, which have high capital requirements and restrictive operating conditions.
Family offices and institutional investors are likely to be early adopters
Mark Konyn, chief executive of Cathay Conning Asset Management, said the reform was long overdue as many overseas markets introduced this type of fund structure long ago.
"Some providers in the industry have been lobbying for such changes and innovation for several years. There has been very slow progress," Konyn said.
Financial Secretary John Tsang Chun-wah announced the planned change in the budget in February last year, but it took 13 months for a consultation paper to be issued. After three months of consultation that began on Thursday, there will be another round on finer details before any law change is made.
Konyn said the new corporate structure would be suitable for funds with certain types of investment strategies but not all funds would rush to use the new format even with a legal approval.
"It remains to be seen whether the mass retail market will embrace the corporate structure. It will not be easy to change market practices and preferences that have been established over many years," he said.
"For specialist managers and non-traditional strategies, the new format could well prove popular, depending on requirements and details. Family offices and institutional investors are likely to be early adopters."
Eleanor Wan Yuen-yung, the chief executive of BEA Union Investment Management, said her company would consider migrating its unit trusts to the new structure after the law change.
"These unit trusts were set up a long time ago and the trust deeds are quite out of date. To support Hong Kong's status as an international financial centre, an open-ended fund structure is a must," Wan said. "Some foreign fund companies, particularly those from the United States, are not familiar with the trust structure, and there are not too many trustees in Hong Kong. I believe there will be more funds setting up in Hong Kong using the open-ended structure for marketing in China."
Onerous trustee provisions are seen as one factor in deterring funds from domiciling in the city. Only 328 of the 1,800 or so retail funds authorised to be sold to the public in the city are domiciled in Hong Kong, according to the Securities and Futures Commission, with the rest mainly in Dublin, Luxembourg and the Cayman Islands.
Hong Kong Investment Funds Association chief executive Sally Wong said her group also supported the proposed reform. "This initiative will help provide more choices and flexibility to fund managers when they structure the fund products. Under the current framework, managers can only use the unit trust structure, but globally, the corporate form is the more popular structure," Wong said.
"This change enables managers to better cater for client needs and thus increases our competitiveness as an asset management centre."
Principal Financial's Asia president Rex Auyeung Pak-kuen said the change would add transparency and increase investors' understanding of fund products.
"Furthermore, with all the cross-border initiatives developing around the region, this will strengthen Hong Kong's position as the regional financial centre," he said.
