Chinese equity and fixed income managers are stepping up their efforts to attract European institutional assets and are marketing this as an opportunity to get ahead of mainstream flows.
Nicholas Yeo, head of equities for China and Hong Kong at Aberdeen Asset Management, told AsianInvestor that while some investors remained sceptical about onshore exposures, there was enough demand to ensure continued inflows.
He noted that a number of pension funds in Europe had received qualified foreign institutional investor (QFII) and renminbi-denominated QFII licences and quotas, but lacked the necessary investment expertise. “They are looking for managers to invest onshore. We want to tap this demand,” Yeo said.
He acknowledged that Chinese equities still represented a tiny portion of European allocations at present, and suggested now was a chance for institutional investors to seek A-share exposure before the mainstream European pension funds invest.
One driver for a broad increase in allocations would be index provider MSCI including China in its benchmark emerging markets index, he said, reiterating a message give by Anthony Fasso, international CEO of $136 billion AMP Capital Investors, as reported.
MSCI is due to review China’s inclusion in its EM index next May. It had included China on its list for consideration last June, with a proposed initial inclusion of a 5% weighting. However, it decided not to take up the option.
Deutsche Bank has estimated that a 5% weighting in the EM index would attract inflows of more than $7 billion to the A-share market.
Aberdeen Asset Management in Singapore received its RQFII licence in September and is in the process of applying for an Rmb600 million ($98 million) quota.
Yeo confirms it is planning to launch a pure A-share fund to European clients, potentially in the first quarter of next year. “The initial idea of starting this fund came from speaking to European clients,” he said.
He explained that its fund would start with a small portfolio of 20-25 stocks and seek to maintain a relatively low turnover rate in what he described as a conservative approach to the market.
Last year the firm’s managing director for Asia, Hugh Young, described China’s onshore equity market as “a bit of a minefield” in an interview with AsianInvestor, as reported.
But investment appetite globally for A-shares has been on the rise amid expectations of continued capital market liberalisation and reform. Despite a market correction last month, China equity mutual funds (both onshore A-share and offshore China equity mutual funds) has recorded a positive inflow of $1.1 billion since April, according to EPFR data.
The A-share market has outperformed the global equity market to date this year, with the CSI300 Index rising 5.3% to 2,354 points by October 20, while the MSCI AC World Index dropped 1.6% in dollar term.
Meanwhile, Au King Lun, chief executive officer at Bank of China-Hong Kong Asset Management, told AsianInvestor it was seeing European institutional appetite for RMB-denominated fixed income amid anticipation of a quickening of RMB internationalisation.
To tap this demand the firm, the investment arm of BOC Hong Kong, last month re-domiciled its high-yield bond fund to Luxembourg, from the Cayman Islands.
The move to Europe’s onshore market allows the fund to obtain Ucits (Undertakings for the Collective Investment of Transferable Securities) status. It is marketing the fund through Citigroup’s distribution network.
Au noted that renminbi bonds generally offered a higher yield than most European equivalents, with a lower correlation to euro- and dollar-denominated bonds.
“Most demand [for RMB bonds] comes from institutional investors as they favour renminbi assets,” he said. “Insurance companies, pension funds and some sovereign funds’ demand for renminbi-denominated bonds is on the rise.”