BlackRock, the world’s biggest asset manager, plans to launch a platform of Hong Kong-domiciled funds early next year. The move reflects a rising trend, with Franklin Templeton having launched a QFII product, the first in a new range of local funds this week.
And it is said that at least one other big fund house is planning a similar move, but AsianInvestor could not ascertain the identity of the firm by press time.
BlackRock has been working on the set-up for over a year by expanding its investment and sales capabilities, and is likely to go live with it in the first or second quarter of 2013, say sources.
“BlackRock does not comment on market speculation," says a spokesman for the $3.67 trillion firm.
Hong Kong is home to some 2,000 authorised funds, of which only about 150 are Hong Kong-domiciled. As of last year, about 70% of all authorised funds in Hong Kong were Ucits-compliant.
Franklin Templeton's new range of funds domiciled on its Hong Kong unit-trust platform includes the Templeton China Opportunities Fund. This new product is sold openly to Hong Kong retail investors, as well as to accredited investors in Singapore.
Until now, the vast bulk of funds sold in Hong Kong by the firm have been Sicav Ucits structures. Franklin Templeton’s is among the largest individual retail cross-border fund umbrellas globally, according to Lipper (and it sources $75.7 billion of its $750 billion in AUM from Asia-Pacific, as at September 30).
Domiciling funds in Hong Kong will certainly result in faster approval of local products, as it won’t require their registration in Luxembourg, says Isabella Chan, director of sales and marketing at Franklin Templeton in Hong Kong (pictured left).
As authorities in Hong Kong and China are in talks over mutual recognition of each other's fund products, she adds it is logical to think that such Hong Kong-domiciled funds would gain first entry into the mainland China funds market, once it opens up.
However, that’s not going to happen overnight, says Chan, although discussions have been progressing between the China Securities Regulatory Commission (CSRC) and Hong Kong's Financial Services and Treasury Bureau.
Legislation needs to be approved at both ends, in the form of mutual recognition of products to allow Hong Kong mutual funds to be sold locally in China and Chinese products in Hong Kong.
At a recent conference, Stewart Aldcroft, senior adviser on funds industry issues for Citi’s transaction services division, made similar points. “There are a number of good reasons why international firms should establish locally domiciled funds. In doing so, they will not be affected by Europe’s Ucits regulations and will potentially gain more immediate access to China.”
Setting up Hong Kong fund structures requires additional cost, but it means significantly quicker product approval by the SFC. The length of time it has taken the SFC to authorise funds since the 2008 crisis – an average of eight-and-a-half months, says the Hong Kong Investment Funds Association – has been a major bug-bear of asset managers.
Indeed, the relatively short time it has taken the SFC to approve RQFII products for Chinese fund houses – as little as six weeks – has sparked tension between mainland firms and foreign managers looking to get funds approved in Hong Kong.
Hong Kong domiciling would certainly help mitigate such issues. “[The potential opening of the Chinese funds industry] is a perpetual topic of discussion between the CSRC and the SFC,” says Aldcroft.
China has not, until now, been in any great hurry to throw the doors open to its funds market, he notes. “But regulations are changing very quickly these days, so being prepared for this change makes a lot of sense.”
“The pressure [to open up the industry] is not that great in China, particularly as fund companies would see that as eroding their current dominance on the mainland,” adds Aldcroft. “A good way to start would be to let in a small number of funds from established managers that already have the requisite approvals in Hong Kong.”
Franklin Templeton’s new fund will be at least 70% invested in A-shares and the initial offer period is November 12–30. There will be an initial cap on the fund of around $100 million, as the firm only received its additional QFII quota ($100 million) in July for investing into onshore Chinese securities. The initial $200 million quota it received years before is fully invested.
Chan points out that the manager can apply for more quota depending on the level of demand from investors, so the cap may be raised in time.
Launching locally domiciled funds has been on the radar for a long time, but the firm has waited for the best time to roll them out, says Chan. The new QFII quota and increased interest in A-shares have been catalysts for this to happen.
Other products are in the pipeline, she notes, and Franklin Templeton has a whole range of funds it can potentially replicate, depending on local market interest.
Asked whether Franklin Templeton has boosted its headcount or infrastructure on the sales or investment side as a result of the fund launch, Chan said the firm has sufficient existing capabilities to run the platform for the time being.
The firm will be reviewing resources and support around the new platform, she adds, but it’s not a requirement to have manufacturing capabilities in Hong Kong for local funds.