BOCI-Prudential Asset Management is carving a niche for itself in the Greater China exchange traded fund (ETF) market, and is preparing to introduce a new Shanghai Stock Exchange 50 Index A-shares ETF this year.
The new ETF product builds on BOCI-Prudential's CSI 300 China Tracker launched in July 2007, which tracks the performance of the top and most liquid 300 stocks on the Shanghai and Shenzhen exchanges; as well as its CSI HK 100 Tracker launched in May 2008, which tracks the performance of the top and most liquid 100 stocks on the Hong Kong exchange. Details of the planned new ETF are not yet available as the product is still awaiting regulatory approval.
BOCI-Prudential, a joint venture between BOC International Holdings and Prudential Corporation, is focusing on building its ETF platform in the Greater China market mainly because that is where its expertise and resources lie.
"We want to position ourselves as a very serious player in the China ETF market," says Hing Tang, Hong Kong-based investment director for quants at BOCI-Prudential.
Tang -- who managed the iShares FTSE/Xinhua A50 China Tracker when he was with Barclays Global Investors (BGI) and co-managed the Tracker Fund of Hong Kong when he was with State Street Global Advisors (SSgA) -- is spearheading the growth of BOCI-Prudential's ETF business. An ETF is a fund that is listed on a stock exchange and is traded just like any other stock; units of the ETF can also be bought directly from the fund provider.
Before joining BOCI-Prudential, Tang served as director for investments at BGI North Asia. At BGI, he was responsible for portfolio management, active research and business development. He also acted as the main advisor to leading institutions, fund houses and regulators in China, Korea, Taiwan and Singapore. Prior to BGI, he was a portfolio manager at SSgA, where he managed various active and passive portfolios.
Tang notes that the move towards the integration of markets in China, Hong Kong and Taiwan is "irrevocable" and BOCI-Prudential is ready to cross list its Hong Kong-listed ETFs when the rules make that possible, which he believes will happen sooner rather than later. Earlier this year, Hong Kong Exchanges & Clearing (HKEx) and Shanghai Stock Exchange signed a pact that facilitates closer cooperation with regard to new Chinese fund issues, including ETFs.
Tang spoke with AsianInvestor about BOCI-Prudential's ETF business:
How is BOCI-Prudential building its ETF business?
Tang: I believe in the potential of the ETF market and the benefit of ETFs to investors. Over the past several years, I have learned something important. We will position ourselves as a very serious player in the China market.
When the CSI 300 Index came out [Editor's note: it was launched in August 2005], I knew this was a very important index and it would be the benchmark for futures indices. I knew we had to launch an ETF based on this index. We have had an exclusive license to this index in Asia ex-Japan except China, for a long time. I can't tell you exactly how long due to confidentiality reasons.
This is a comprehensive and representative index. It's more like the S&P 500 Index in the US. The China Securities Index Company is a JV between the Shenzhen and Shanghai Stock Exchange. I will call it a semi-government kind of agency. The mandate is to come up with this cross-market index, an index that will truly represent the China A-share market, and that's what led to the CSI 300 Index.
Many of the funds in China use the CSI 300 Index as their benchmark. This is the broad market index, the foundation that people use to think about styles later on, like large-cap or small-cap indices. This is the building block. It is well recognised in China. In Hong Kong, it is not as well recognised we are getting there.
What will it take for Hong Kong investors to realise the importance of the CSI 300 Index?
Once the index futures come out, the CSI 300 Index will really fly. My understanding is everything is ready with the index futures, and once the leadership approves it, it will be available.
What led you to introduce the CSI HK 100 Tracker?
When we worked on the CSI HK 100 Tracker, it proved to be tougher in terms of coverage and popularity. It was tough for us initially because the Hang Seng Index has been here for a long time and is obviously very popular. The index that serves as the basis of this ETF, the CSI Hong Kong 100 Index, is practically brand new. [Editor's note: it was launched in May 2008].
But I was more than happy to launch the CSI HK 100 Tracker because I have a very long-term vision for that fund, especially for the QDII market.
Your two ETFs are listed only in Hong Kong. Is it your goal to have a cross listing in China?
Exactly. The development goes on and we all know that the move towards integration between China, Hong Kong and Taiwan is irrevocable. Even the regulators understand this. This is a big trend and we are working to be part of that.
What kind of demand have you seen for the CSI 300 China Tracker and the CSI HK 100 Tracker since they were launched?
The CSI 300 China Tracker demand, although still smaller than a competitor's product [Editor's note: he is referring to the iShares FTSE/Xinhua A50 China Tracker, which he co-managed at BGI], has been doing well. ETFs in Asia are a no-brainer, they are very attractive.
This CSI 300 Index is a much more important index for the future. Hedge fund, market makers, brokers they understand this. So we expect demand for our CSI 300 China Tracker to continue to grow.
The fund size of the CSI 300 China Tracker is okay at more than $600 million. The fund size of the CSI HK 100 Tracker is about $10 million now. The fund size of that fund is smaller than when we launched, when it had around $20 million in assets, mainly due to what has happened to the market. It's not very liquid at the time being and we have to continue to work on promoting the CSI Hong Kong 100 Index.
What is your target investor?
Both retail and institutional. For the time being, the institutional investors understand ETFs more. But I am very confident that when the time comes, retail investors will realise the importance of ETFs. In the US, they know what SPDR is [Editor's note: SPDR is the brand name used for ETFs based on Standard & Poor's indices]. That will happen in Asia with certain local ETFs.
Is building the ETF business a priority for BOCI-Prudential?
Yes, it is important for asset profiling and building our brand name.
What is the total AUM of BOCI-Prudential at the moment?
Close to $5 billion.
What is your strategy in building your ETF business? Are you now focusing on your two ETFs or are you planning more launches?
We are proposing to launch the Shanghai Stock Exchange (SSE) 50 Index A-shares ETF in Hong Kong. We got the agreement in principle and we are still waiting for official authorization. Our partner, initial market maker is KBC and because they are so experienced, hopefully that will pick up the volume. Large-cap indices are important. Even Nomura in Japan is tracking this, the largest and most liquid ETF in Japan.
Is the focus on China largely mainly due to the company's expertise?
It's a combination of that and the demand from the market. The A-share market provides a genuine diversification from the Hong Kong investor.
Are you launching one ETF per year?
I want to take an offensive strategy. Cross listing will happen in the future and I want to be prepared for that.
Will you continue to focus on Greater China?
If I manage to get the mainland and Taiwan, that will occupy me for the time being. I like new ideas, and I have an idea for an ultimate ETF, but I cannot talk about it yet. I am a bit aggressive.
Will you targeting other markets in the future?
Yes, we are working on that. We have some prospects in Korea.
You have been involved in ETFs in Asia since 2000. How has the ETF market in Asia evolved over the years?
Our market is not that deep yet. Asian investors are still punting stocks. It will take time to change this mentality. Hedge fund managers and allocation managers understand this and they use ETFs. Retail investors are still slow and they still think they can bet on individual stocks. It will take time, but I am very optimistic especially given the impact of the crisis on risk appetite.
How has the crisis affected demand for ETFs?
People realise that there are risks in investing in stocks. Demand for ETFs is much stronger and convincing now. I would just say that ETFs will help investors avoid specific risks. Markets can still go down, but you can go long or short an ETF. Shorting or borrowing ETFs is very popular in the US and actually helps investors. In Asia, shorting or borrowing is very expensive but I think when demand comes, the cost will come down a little bit.
What are the other risks involved in investing in ETFs?
The construction and management of the ETF are risks if the fund managers cannot track the index properly. A share ETF involves an issuer so there's also counterparty risk. We work with the SFC and the effective exposure to counterparty risk of our ETFs is limited to 15%.
The April edition of AsianInvestor magazine will contain a feature on the ETF market in Asia.