Aberdeen Asset Management is considering launching a dedicated China A-share fund and mulling setting up an onshore presence on the mainland.
The firm, which manages around $100 billion in the region ex-Australia (90% in equities), is also intent on introducing direct property investment capabilities to Asia, which it doesn’t have at present.
Aberdeen could be described as contrarian when it comes to investing in China. To date it has received $200 million in qualified foreign institutional investor (QFII) quota.
However, unlike a number of rivals, its China onshore investment is split about 70% to fixed income and 30% into A-shares, which might be considered a reserved approach for one of the market’s leading emerging market equity investors.
Hugh Young, the firm’s managing director for Asia, tells AsianInvestor: “We have always been a bit contrarian [when it comes to China]. We have not been great fans of Chinese equities, we think it is a bit of a minefield.
“We have found more comfort in places like Thailand and Malaysia, where we know the rules and we are more comfortable. China is still a bit nebulous.”
Nevertheless, Young confirms that Aberdeen AM is applying for more QFII quota and says it is considering whether to launch an A-share fund. “We do not have a China A-share fund currently, that is a possibility. We are not ultra-bullish on China A-shares, but we think we would do a good job.”
He adds it is also weighing up the benefits of establishing an onshore presence in China, although admits the firm is not keen on joint ventures, where foreign parties are limited by regulation to a 49% holding.
“The investment process is vital for us to control, as well as compliance and finance,” he notes. “It is also hard to find the right partner. Ultimately we would want to run it ourselves and brand it Aberdeen.”
One avenue for Aberdeen is setting up a wholly foreign owned enterprise (WFOE), which it could own 100%. It would need to apply for a licence from the State Administration for Industry and Commerce, then choosing its intended business scope from a catalogue, with one option being “investment advisory”. That would not allow it to manage money, although permitted activities under this advisory category are not clearly defined.
Another area that Aberdeen is viewing with interest is the proposed cross-border mutual recognition scheme between Hong Kong and China as a way to access domestic Chinese investors. Aberdeen has a series of Luxembourg-based funds authorised for sale in Hong Kong at present.
“These are the things we are looking at,” says Young. “A wholly owned foreign enterprise in China would give us more control. Things are changing there a bit [in China], but it is still not the most transparent. We may have to wait for the laws to change, or we don’t go onshore.”
On the question of direct property investment in Asia, Young notes this is something Aberdeen is intent on adding. “One of the gaps we are looking at is direct property, which we do not have in Asia while we do elsewhere in the world,” he says. “That is a clear void that we aim to fill, although we have put no time horizon on it. There will be a beefing up there.”
Aberdeen manages around $50-$60 billion in dedicated global emerging markets strategies, of which about half is invested in Asia. It soft-closed on Asian equities years ago, and hard-closed on GEM equities at the start of this year.
As a house it has been trying to build up its fixed income capabilities, and Young says it now has the best part of $10 billion in Asian fixed income. Outside of Australia it has a team of 10 on the macro and corporate debt side, with people based in Singapore, Kuala Lumpur and Bangkok.
“Up until the last few years people did not recognise Asian fixed income as an asset class,” says Young. “It has been quite an education process, but we see this as a substantial long-term growth story.”
Young believes the six-month stock market rally in Japan (which has corrected sharply since May 22 to just 12,877 points on Friday) is a false dawn. “The policies were totally wrong and the market was cheap,” he says.
“This is the type of situation where the market bounces and people think ‘we had better put money into Japan’. But has anything fundamentally changed there? I don’t think so.”
Nevertheless, Young confirms that Japan is still Aberdeen’s largest single country exposure in Asia. “We have been underweight in Japan for 20 years and we have been building it up a bit. But we find good growth opportunities outside of Japan.”