Chinese equities comprising ‘smart beta’ ETF slated for Hong Kong debut Tuesday

Hong Kong’s Premia Partners will launch the ETFs on the Hong Kong stock exchange

PUBLISHED : Monday, 23 October, 2017, 8:00am
UPDATED : Monday, 23 October, 2017, 8:00am

Chinese shares will have their first “smart beta” exchange traded funds (ETFs), in preparation of this year’s landmark decision made by US index provider MSCI to include yuan-denominated stocks into its Emerging Markets Index.

The ETFs, set to be listed in Hong Kong on October 24 by Premia Partners, will also be the first to trade through the Shanghai and Shenzhen Stock Connects instead of the qualified foreign institutional investor (QFII) and the renminbi qualified foreign institutional investor (RQFII) quota schemes.

Global asset allocators may need to choose whether to take an underweight position or add exposure to Chinese equities when the MSCI starts adding 222 large companies to its share benchmark, that will be made in a two-phase process in May and August next year.

But new investors to yuan-denominated equities in the mainland, who are unfamiliar or lack the capacity to research and select Chinese equities, may instead find it easier to buy the ETF, a security which tracks a basket of stocks, according to Hong Kong investment firm Premia.

“This [MSCI inclusion] is going to be a catalyst for the A-share market in the coming months” said David Lai, partner and co-chief investment officer of Premia, noting that investors typically position beforehand even if the stocks represent a weighting of only 0.73 per cent in the benchmark.

Inclusion in MSCI indexes may spur U$17 billion to US$18 billion of inflows from asset managers, pension funds and insurers into the mainland equity markets in the short term, rising to US$400 billion over the next decade, analysts estimate.

Hong Kong has as many as 118 ETFs but the variety is still quite limited, with most being “naive beta” ETFs that track the same, few well-recognised indexes and adjust weightings of the portfolio based on the size of the company’s market value, Lai said.

This approach creates a problem for the fund by increasing holdings when stock price goes up and vice versa, resulting a “buy high, sell low” situation, he said.

Premia’s ETFs, however, are the first A-share funds embracing technological changes through the fast growing “smart beta” strategies, that apply a rule-based approach in data analysis aimed at outperforming the broad market and passive indexes.

The low-cost, efficient and transparent characteristics of passive management are combined with active management fundamentals that use a filtering process to select companies based on their financial health and volatility.

“People have inserted factors such as momentum and dividend from developed markets into China indexes but it doesn’t necessarily work. Our smart beta is based on research of factors specifically for China,” Lai said.

The CSI Caixin China New Economy ETF will capture leading technology companies found in China’s Nasdaq-style start-up board, ChiNext Price Index while the CSI Caixin China Bedrock Economy Index ETF will consist of mainstream old economy companies.