Invesco Great Wall has completed initial fundraising for the first actively-managed mutual fund investing in Hong Kong equities via Stock Connect.
Coming just weeks after China-based mutual funds received the go-ahead to invest in the stocks, industry sources indicate that 20 more such funds are set to raise money.
However, it has been forecast that existing China funds will need to set aside considerable time and resources to be ready to make southbound trades because of the additional back-office infrastructure needed.
Shenzhen-based Invesco Great Wall Fund Management, a joint venture of Invesco and Great Wall Securities, completed its fundraising on Monday. It raised Rmb11 billion ($1.8 billion) between March 26 and April 13, mainly through domestic banks. It is the second-largest fundraising in China so far this year.
The fund has been structured to invest in both onshore A shares and Hong Kong stocks, and can allocate up to 95% of its capital to the city’s shares via the trading link.
“These two markets are dominated by different styles of investors,” said Jackie Zhao, deputy director of product development at Invesco Great Wall. “The Hong Kong market is more mature but onshore A shares are more about growth companies whose capitalisations are usually medium- and small-sized - we want to include both markets and balance the risk and return.”
Zhao told AsianInvestor that the firm started preparing the fund after details of the Shanghai-Hong Kong Stock Connect launch were announced in April last year. The firm had been discussing its product ideas with the China Securities Regulatory Commission (CSRC) since July 2014, and submitted product details for registration in September last year.
The CSRC actually approved the fund in December last year, but only allowed two firms - China Asset Management and China Southern Asset Management - to launch exchange-traded funds tracking Hang Seng Index that month.
More than 20 new funds structured to invest through Stock Connect have registered with the CSRC, and banks have been in recent discussions with managers over the launch of such funds, according to an industry source. Shenzhen-based Bosera Funds plans to produce the second Stock Connect fund, but has not confirmed the launch date.
In a bid to boost southbound trade, on March 27 the CSRC gave permission for Chinese mutual fund managers to buy Hong Kong shares through Stock Connect without a qualified domestic institutional investor (QDII) licence. Those funds which have not been given permission to buy Hong Kong-listed stocks will need to gain approval from shareholders, while QDII holders which previously invested in the city’s shares can use Stock Connect now.
But Zhao said he expected existing funds to have to devote considerable time to amending rules in order to participate in Stock Connect, because managers will need more back office and operational support to trade on the cross-border link.
“The whole mechanism is totally different - for example, a QDII fund needs an offshore custodian but Stock Connect funds will not need one; and a Stock Connect fund will trade Hong Kong shares through domestic brokers,” said Zhao.
Amid the strong sentiment towards equity this year, 129 Chinese mutual funds raised Rmb237.3 billion in the first quarter, which is a new quarterly record, according to Shanghai-based consultancy Z-Ben Advisors.
January Sun, a Z-Ben analyst, was optimistic that Stock Connect funds will be attractive to retail investors.
“[Invesco Great Wall’s] success in fundraising may relate to the recent rally of the Hong Kong market, as both fund companies and retail investors want to seize the opportunity in [investing] in Hong Kong,” Sun said.