Asset manager Enhanced Investment Products (EIP) will list a smart-beta exchange-traded fund in Hong Kong today, amid increasing bullishness among ETF providers about the prospects for such products.
Hong Kong-based EIP’s Xie Shares CLSA Gary ETF leverages financial services firm CLSA’s ‘growth at a reasonable yield’, dividend-focused strategy – hence the name. The index comprises 65 constituents which derive some 80% of their revenue from Asia Pacific, excluding Japan and China A-shares.
Tobias Bland, EIP’s chief executive, said institutions in Australia and Singapore had indicated their interest in the product.
CLSA’s head of micro-strategy, Desh Peramunetilleke, said the Gary strategy had been his firm’s best performing dividend theme over the past decade. “While Asia has been largely viewed as an oasis of growth in the past, dividends are increasingly a significant portion of a company's total return.”
A ‘reasonable’ yield in this context means investing in companies that have more than a 3% dividend yield, forward earnings per share growth and profitability measures that are better than the regional average. Additionally, the firms should have a sustainable dividend yield based on positive free cash flow, a solid dividend track record, a yield that is not high owing to recent price action (value traps), and a net debt ratio that is less than 80%.
Bland told AsianInvestor, “Reinvested dividends have formed almost half of the total returns for the region in the last 15 years.”
In addition to the usual wealth management and retail brokerage channels in Hong Kong, he said the fund would appeal to institutions, which might use such a product for marginal emerging-markets exposure. “It does a lot of the work they would otherwise have to do themselves, to buy two or three stocks in India or the Philippines.”
There is certainly strong momentum behind the growth of smart beta ETFs, according to consultancy EY’s annual survey of the ETF industry, released late last month. It polled 80 fund promoters, investors, market-makers and service providers across the US, Europe and Asia Pacific. Of those surveyed, 89% plan to increase their range of smart-beta products over the next two years and 95% expect investor allocations to smart beta to increase over the coming year.
Julie Kerr, Hong Kong-based director of Asia-Pacific financial services at EY, said: “ETF promoters believe that smart-beta products tailored to the needs of institutional investors put them in a sweet spot, enabling them to capture funds that would otherwise have been divided between passive mutual funds and actively managed accounts.”
Despite indicating optimism about the ETF market, the EY survey suggested there was a sense among some providers that not all Asian regulators fully understood the structure and behaviour of certain products, such as inverse and leveraged ETFs.
“The ETF industry needs to ensure that it engages with regulators in a consistent way over potential areas of misunderstanding,” said the report.
Hong Kong was viewed as likely to follow the trend for leveraged and inverse ETFs seen elsewhere in North Asia, once such products are given the green light in the city. Kerr noted that leveraged funds are enjoying significant success in markets such as Korea, Taiwan and Japan.
“There appears to be significant investor demand,” she said. There are several leveraged ETFs in the regulatory pipeline in Hong Kong, she added, with the first one expected to be launched “very soon”.
However, not all agree that Hong Kong's regulators are taking the right approach to ETF regulation. The city's government-backed Financial Services Development Council, for instance, last week suggested that the Hong Kong was being overtaken by other markets in Asia as an ETF hub, as reported.