Aberdeen will focus on fixed income for new QFII quota

The UK-based asset manager wants to build up its bond franchise, with China central to its plans, but renminbi funds in Hong Kong are not currently on the agenda.

Aberdeen Asset Management has received a qualified foreign institutional investor (QFII) licence, allowing it to invest in domestic Chinese securities. The UK firm says it expects to have the quota amount confirmed in the next few months, but says it has no firm time line, “as this clearly is not in our hands”.

Once the quota amount – up to a possible $200 million – is approved by China's State Administration of Foreign Exchange, “nearly all” of it will be used for fixed-income products, a spokesman tells AsianInvestor. “We applied for Chinese equities only for dedicated accounts."

“We have been enlarging our regional bond franchise, and with China the largest domestic market, it had become desirable to run portfolios as flexibly as possible,” he adds. “Being able to invest domestically means being able to take a view on interest rates as well as individual issues.”

Aberdeen’s Asian fixed-income team, based in Singapore, manages some $5 billion of assets for regional and global investors.

Meanwhile, China's announcement in June on renminbi depegging and last month's relaxation of rules on RMB settlement and trading in Hong Kong were not factors in the desire to obtain a licence, since Aberdeen applied for it in 2008, says the spokesman.

While China’s currency markets are accessible to global investors through offshore non-deliverable currency forwards, says Aberdeen, this is not always the best way of taking advantage of the investment opportunities over the longer term. Having a quota to invest onshore clearly allows the investor to take a direct view on the underlying bonds and equities themselves and not just the renminbi.

In a regional bond market which can exceed 10 countries (excluding Japan), China has easily the largest domestic market and now comprises almost 15% of the widely-used Iboxx Asia ex-Japan local currency index, Aberdeen points out.

Moreover, the firm sees China’s index share growing substantially in the years ahead as, in addition to government issuance, companies are being encouraged to diversify their borrowing away from bank debt.

Anthony Michael, Aberdeen's head of Asia-Pacific fixed income, says: “Overall, we expect the development of China’s financial markets to provide many opportunities to diversify our investment strategies across the region for many years to come. Not just to be long the Chinese currency, but also to achieve diversified credit and interest-rate strategies for our clients as well.”

However, Aberdeen is more cautious about the use of QFII for regional equities, where its funds under management amount to $52.1 billion. Aside from a handful of dual-listed H- and mainland A-shares, where A-shares may be cheaper, it does not see immediate buying opportunities because of long-standing governance and quality concerns. Hence it will only use any quota for specialist Chinese mandates.

The company says it has no immediate plans to launch new funds as a result of being granted this licence. Nor does it currently have plans to launch RMB funds in Hong Kong, says the spokesman, but it is not ruling out the possibility. Other fund managers, such as Harvest, HSBC and RCM, have recently expressed interest in developing such products.

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