Tracker Fund may replace State Street as manager to forestall risks to Hong Kong’s pensioners amid rising US-China tension

A seven-member supervisory committee chaired by George Hongchoy Kwok-lung may soon name the winner of a tender to review the Track Fund’s management
Hang Seng Investment Management is at the top of a shortlist to replace State Street that includes CSOP Asset Management and other Hong Kong-based asset managers

Banking & finance

Enoch Yiu

Published: 7:00am, 28 Mar 2022

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Hong Kong’s Tracker Fund (TraHK) is poised to appoint a manager to replace State Street Global Advisors, a move aimed at mitigating the risk of letting the city’s largest exchange-traded fund (ETF) become a bone of contention in rising US-China tension.

A seven-member supervisory committee chaired by George Hongchoy Kwok-lung may soon name the winner of the tender to manage TraHK, said two people familiar with the plan. The new mandate may be subject to regular reviews, and its duration would have to be approved by the Hong Kong Monetary Authority (HKMA) and the city’s Securities and Futures Commission (SFC), they said.

Hang Seng Investment Management is at the top of a shortlist of contenders to replace State Street that includes CSOP Asset Management and other Hong Kong-based asset managers, they said, declining to be named for discussing a matter that has not been publicly announced.

The plan would end State Street’s open-ended mandate in one of the city’s most popular investment funds, more than a year after it flip-flopped over its compliance with Donald Trump’s November 2020 ban on American ownership in Chinese state-owned companies. An initial decision in January 2021 to divest the stocks from TraHK’s portfolio quickly drew a round of rebukes by Hong Kong officials.

George Hongchoy Kwok-lung, Executive Director of The Link Reit, and chairman of the Tracker Fund’s supervisory committee, during an interview in Kwun Tong on 27 February 2014. Photo: Edmond So.

During the waning weeks of his presidency, Trump signed an executive order to ban US investments in Chinese state-owned companies for what he deemed “ties to the Chinese military.”

The order listed 35 stocks, including three constituents of Hong Kong’s benchmark Hang Seng Index – China Mobile, China Unicom and China National Offshore Oil Corporation (CNOOC) – with 4.27 per cent in combined weighting. Joe Biden’s administration expanded Trump’s list last August and added 24 more companies under the investment ban.

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After the backlash and rebuke from Hong Kong officials, TraHK backed down from its initial decision to sell the banned stocks, opting instead to warn American investors that the fund was inappropriate for them to invest in.

Still, the debacle prompted calls in Hong Kong to pick a fund manager without ties to the US to avoid any conflicting interests between abiding by US sanctions and disenfranchising investors.

TraHK was set up by the HKMA in November 1999 to dispose of the city government’s equity holdings accumulated in a two-week, HK$118 billion intervention to prop up stock prices during the 1998 Asian Financial Crisis.

State Street was awarded the mandate to manage TraHK in 1999. The fund, with HK$111 billion (US$14.2 billion) of assets under management as of March 25, is popular with the 4.5 million investors of Hong Kong’s Mandatory Provident Fund (MPF) and is sold by at least a dozen MPF funds to pensioners.

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Hongchoy, the chief executive of Link Asset Management, was picked by the HKMA in 2014 to chair the committee that meets quarterly to oversee TraHK’s operation. Among the other members is the HKMA’s deputy general counsel Stephen Law Shing-yan.

The supervisory committee’s role includes the power to change its manager “for good and sufficient reason” where the change “is desirable in the interests of unit holders,” according to the fund’s prospectus during its 1999 initial public offer (IPO).

The committee held a tender in the second half of 2021, drawing bids from Chinese, European and US asset managers, including a bid by State Street, sources said. State Street did not respond to requests for comment.

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While US firms are not discouraged from bidding, they must convince TraHK’s supervisory committee that they can handle any US sanctions impartially and put investors’ interests above all else, a source said.

Hang Seng Investment, a wholly owned subsidiary of HSBC’s Hang Seng Bank unit, was established in April 1993. It has HK$184.2 billion worth of assets under management, including 48 ETFs and retail funds, making it the largest ETF manager in Hong Kong.

Most of Hang Seng Investment’s funds use HSBC Institutional Trust Services (Asia) as trustee, which puts HSBC in the position to replace State Street as trustee if Hang Seng wins the mandate to manage TraHK.