Recognizing the mutually beneficial path for funds

Stewart-Aldcroft

By Stewart Aldcroft

Eagerly awaited in Hong Kong, the Mutual Recognition of Funds has the opportunity boost sales of funds in the city. Stewart Aldcroft investigates what’s on offer.

Since July 1 2015, the Mutual Recognition for Funds (MRF) has been in operation. This has been in the planning stage for a number of years, and was first announced in January 2013. The MRF scheme is intended to allow the cross-border sale of mutual funds and unit trusts between Hong Kong and Mainland China. In effect, subject to some restrictions, all funds registered and/or authorized in either jurisdiction, will be able to be sold to retail investors in the other jurisdiction.

This has been eagerly awaited by the fund management industry in Hong Kong, although fund managers in China have been much more muted in their response to it. Now that it has become a reality, this article aims to look at what’s on offer, and whether it could lead to a boost in the sales of funds, particularly in Hong Kong.

Figure 1 points out the principal terms for MRF as have been disclosed to date. The challenge for global fund managers is to be able to access distribution in China, which has usually been dominated by the major banks. Of course, there is also competition from local fund companies. But the key questions must be:

  • Why would Mainland investors be interested in investing globally?
  • Will they use or choose local rather than global managers to do so?

Answer these successfully and you might be assured success in selling fund products. But there is also keen competition for fund sales and the local fund companies remain in prime position to benefit.

Ask anyone on the street in Beijing, Shanghai or another major city in China if they have heard of globally important companies such as BlackRock, Vanguard, Fidelity or the like, and they will say “No”. While these are brand names familiar in Hong Kong and in the West, they are not known in China. So “branding” will be a challenge. Can you imagine seeing the MTR stations in Beijing or Shanghai plastered with adverts for these global names, as we are now used to seeing in Hong Kong’s Central MTR Station.

And remember, too: many of the top 10 fund management companies in China already have the names and details of more than 20–30 million customers who have invested with them, which could be ideal for a mail drop.

Figure1: Principal terms of the Mutual Recognition of Funds scheme 圖一 基金互認協議主要內容

Figure1: Principal terms of the Mutual Recognition of Funds scheme
圖一 基金互認協議主要內容

But, in Hong Kong, we do have the benefit of “investment tourism”. Many are already very familiar with the numerous daily visitors who come across the border from China into Hong Kong to spend large amounts of money in its shopping malls. In 2014, it was estimated that Hong Kong received more than 45 million visitors from China. Many do so as part of organised tours, which includes part of their day being spent in the offices of one or more financial organizations, where they can hear about the benefits of investing in some of the existing 1,800 mutual funds on offer in Hong Kong. For these people, MRF or passporting only opens the shop window to the much larger choice on offer. A survey done on behalf of the Hong Kong Investment Funds Association in early 2014 identified that nearly 25% of fund sales in Hong Kong were from Mainland Chinese investors. Anecdotally, this figure, if anything, seems to be considerably underestimating the true numbers.

China is clearly trying to increase and improve the access it provides to its markets for global investors at the same time as it is gradually opening up global markets for its local investors. For the fund management industry, there have been initiatives under a variety of acronyms, such as QDII, QFII, RQFII, QDLP, etc. Quotas for each one have been given out and managers have sought to raise money through a variety of funds products, including ETFs, UCITS and mutual funds. In time, these will no longer be needed, as the ultimate objective of the Chinese authorities remains to open their markets in full to the rest of the world.

So will MRF boost fund sales in Hong Kong? Probably, as there will inevitably be more competition to the existing market leaders, thus leading to greater activity on the sales and marketing front. This will be a good thing and should be viewed as the most positive development to have occurred for funds for almost a generation. BM