Increasing numbers of Chinese fund managers are expected to list ETFs overseas without a foreign partner, according to a market player.
Foreign managers are also expected to abandon sub-advisor partnerships as they instead look to utilise their RQFII quotas.
As low-cost providers look to reduce expenses and avoid having to share revenues, the senior ETF figure sees the shift away from partnerships as a logical move.
Chinese managers started to launch exchange-traded funds overseas a year and half ago through the renminbi qualified foreign institutional investor (RQFII) scheme - in late 2013 Harvest Fund Management teamed up with Deutsche Asset & Wealth Management to list the first RQFII China equity ETF in New York.
Since then, several partnerships have listed funds in the US and Europe over the last year, and CSOP made a landmark move to list its flagship FTSE A50 ETF in New York in March.
“A lot of managers are looking at CSOP as an example of whether they can do a listing independently in the US or Europe,” said Shawn McNinch, senior vice-president and global head of ETF services at the US-based custodian Brown Brothers Harriman (BBH).
“Chinese asset managers will watch whether [CSOP] can gather more assets through more inflows; if it does, I would not be surprised to see more Chinese managers replicate a similar strategy in going to the US on their own.”
McNinch noted that this avenue is more challenging for Chinese managers because they needed to build infrastructure to support the product, for example by building its operational system and sales team, or hiring people to interface with its custodian and distributors.
“Crucially, the managers need to build a good relationship with local brokers and dealers who are the authorised participants in the creation and redemption of ETF shares,” he added.
McNinch pointed out the importance of continuous promotion in the local market: “if MSCI includes China A shares into some of their emerging market indices, the China A-share ETF managers will have to educate investors on how their ETFs can be part of an investor’s overall global asset allocation strategy.”
In a partnership listing RQFII funds, such as between Deutsche AWM and Harvest, China AMC and Van Eck Global, or E Fund Management and KraneShares, Chinese managers are usually the sub-advisors and providers of RQFII quotas, while they leverage the sales and distribution channels of their partners in the US and Europe.
McNinch said there were mutual benefits for both parties in a partnership, which was why some managers still preferred this approach.
However, with the expansion of the RQFII scheme, some Chinese managers’ sub-advisor role may be reduced in the future since more overseas ETF providers are likely to win RQFII quotas to access China. Deutsche AWM and Vanguard won their first batch of quotas in March and April respectively, French firm Lyxor won its quota in May, while UK-based ETF provider Source received its RQFII licence in March and has been awaiting quota approval.
“Someone like Source or Vanguard will have the potential to launch their own [RQFII] products without sharing revenue. It is important to low-cost providers like Vanguard to see whether they can reduce sub-advisory costs. It makes sense,” said McNinch.
“[But] they have to understand the market locally, as well as know how to execute the best trades in order to minimise the trading cost and tracking error.”
In all, there were 35 China equity (onshore and offshore) ETFs with total assets of $15.3 billion in the US as of June 8, compared to 32 such ETFs with total assets of $11 billion as of the end of 2014, according to London-based research house ETFGI. Meanwhile there were four China bond ETFs with combined assets of $241 million as of June 8, compared to their total assets of $246 million at the end of 2014.
There were 13 China equity ETFs in London with total assets of $3.7 billion as of June 8, compared to their AUM of $3.4 billion at the end of 2014, according to ETFGI.