Hong Kong’s Tracker Fund to resume investing in companies sanctioned by US following U-turn by manager State Street Global

The manager of Tracker Fund, Hong Kong’s largest exchange-traded fund (ETF), will resume investing in Chinese companies listed in the city that have been sanctioned by the Trump administration.

Buckling under pressure from government and financial officials, State Street Global Advisors Asia, a unit of the Boston-based company, said on Wednesday that it would resume investing in all constituent companies of the Hang Seng Index to remain consistent with its mission of providing investment results that closely correspond to the performance of the benchmark.

Its U-turn comes two days after the manager declared that it would not be able to buy any more stocks of sanctioned companies. This included the shares of China Mobile and China Unicom, both Hang Seng Index components. The telecoms giants are covered by US sanctions effective from Monday. Restrictions against CNOOC, another blue-chip stock, will become effective from next month.

State Street Global’s about-turn underscores the quandary faced by compilers of stock benchmarks, banks and other financial services providers, as they grapple with how to comply with a vaguely worded executive order issued in the twilight of Donald Trump’s presidency.

Wednesday’s development comes on the heels of a flip-flop by the New York Stock Exchange, which made two U-turns in as many days over whether to allow trading in the American depository shares (ADSs) of three of the US-sanctioned companies on its board.

“TraHK will resume investments in sanctioned entities that are constituent companies of the Hang Seng Index with effect from 14 January, 2021,” State Street said in a Hong Kong stock exchange filing. “We appreciate the significant public interest given the importance of TraHK to the Hong Kong markets and hope that the resumption confirms our commitment to track the Hang Seng Index for TraHK, as we have done for the past 21 years.”

The HK$105.3billion (US$13.6 billion) Tracker Fund, also known as TraHK index fund, is popular among Hong Kong retail investors because it is simple to trade, it is cheap and because it tracks the Hang Seng Index. More than 184,000 retail investors bought the fund at HK$11.5 per share at its initial public offering in 1999. Moreover, the city’s 12 Mandatory Provident Fund investment funds use it to make investment decisions, making it the most widely held investment by Hongkongers. The fund closed at HK$28.4 on Wednesday.

It holds a 2.6 per cent stake in China Mobile and 0.27 per cent of China Unicom, as well as 1.14 per cent of CNOOC. All three companies are among 35 Chinese companies sanctioned by US President Donald Trump for alleged ties with the Chinese military.

Complying with the sanctions would have deprived investors of some of the most generous dividend payouts in Hong Kong. Non-compliance might subject the provider of the financial service or instrument to penalties under US regulations.

It took pressure from Carrie Lam Cheng Yuet-ngor, Hong Kong’s leader, and Joseph Yam Chi-kwong, the former chief executive of the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, to get State Street Global to change its stance, after they vowed on Tuesday to replace it as Tracker Fund’s manager, should it not follow its mission of reflecting the constituents and results of the Hang Seng Index.

Their intervention has protected the interests of millions of retail investors and pensioners in Hong Kong. “The Hong Kong government has done the right thing, taking a strong stance to safeguard the interests of investors in Hong Kong,” said Tom Chan Pak-lam, the chairman of industry body Hong Kong Institute of Securities Dealers.

“This will encourage other US and international firms to follow suit when they struggle between following US regulations and fulfilling their duty to Hong Kong and Chinese investors,” he said, adding that State Street Global’s U-turn would provide a boost to the Hong Kong market.

HKMA, which has the power to replace State Street Global as Tracker Fund’s manager, said it would keep a close watch over the matter. The manager’s statements over the past couple of days had created “unnecessary market uncertainties. The HKMA has since followed up on the matter in close contact and communication with the Tracker Fund Supervisory Committee and State Street”, a spokesman said.