Paul Hoff is the Tokyo-based Asia-Pacific managing director of index provider FTSE Group. He opened the group's first office in Tokyo in January 2003. He is responsible for FTSE's activities in the whole of the Asia-Pacific region including managing the index provider's regional headquarters in Hong Kong, which started operating in 2001. He oversees business development in the region and works to develop further partnership initiatives in the local financial communities. He also directs the sales, marketing and client services functions. Hoff shares with AsianInvestor his views about the ETF market in Asia and the prospects for growth in this market.
This is the last of a two-part interview.
Japan is the obvious leader in terms of the number of ETF products and AUM in Asia. Do you expect Japan to continue to lead the way in Asia?
Hoff: The origin of the large assets in ETFs in Japan is there are many financial institutions that put their portfolios into the ETFs here. There's a lot of duplication here, there are a lot of large-cap ETFs. You have three Topix ETFs, three Nikkei ETFs, there is a lot of overlapping.
To make the Tokyo Stock Exchange a viable place for foreign investors as well as Japanese institutions, there's a lot of education that still needs to take place. There needs to be more variety in the kinds of ETFs being provided. That's why we are very excited that we are going to be the first index provider with an environmental-themed ETF. That listing is due by the middle of April. The ETF manager is going through the approval process right now and typically what happens is they will get the final approval one day and they will launch the next day.
How do you see the prospects of the growth of the ETF market elsewhere in Asia?
There has been a great deal of hesitation to move aggressively until we see volatility muted a bit. In other markets, we are seeing renewed interest with DBS wanting to put out a variety of products for investors. That is one space to watch. I think the conversion of the KLCI to the FTSE Bursa Malaysia KLCI will provide some impetus for the Malaysian market. And we also have a custom index that we created for Malaysia that will have an ETF launched on it. That will be another thematic ETF based on plantations that will be particularly interesting. That's another market where there is a vibrant mutual fund business but the ETF market is still in the early stage.
How quickly can you customise an index for an ETF provider or for an exchange?
Very quickly. We can have an index up and running in a few weeks and then get it on in a real-time basis within a month of it being created.
Although there was a slowdown in ETF launches in the third and fourth quarter last year, the ETF launches in the first quarter of this year have been promising, especially in Singapore. What are your expectations for this year?
We are working with people now and working to customise some indexes. We are also seeing a broader interest in Australia as well. China could be an interesting market going forward. The Shanghai Stock Exchange has an initiative to get foreign ETFs listed on the domestic market. They want those to be managed by their domestic fund managers. That will be quite a challenge, but if they succeed they could be bringing a whole new set of ETF managers into fruition by giving them the opportunity to list on the Shanghai Stock Exchange.
Do exchanges work on an exclusive basis or are they open to all index providers?
For a while in Taiwan, the policy was to work with only FTSE but now it has been opened up. Exclusivity does not necessarily breed success. Having competitors actually speeds up the development of the ETF market.
One thing to keep in mind though is that the local fund managers who want to get into the ETF market, they will have experience in their own market but when they go into overseas market, they will have more challenges.
In your experience, which exchanges in Asia are more proactive in developing the ETF market?
Taiwan got very busy very soon and now has a variety of ETFs in the market so investors now have a good opportunity for diversification. Hong Kong has seen China products to be very successful. We also see the Singapore and Malaysian exchanges providing platforms and encouraging ETF listings. Australia is starting to develop its ETF market also mostly for domestic investors.
Are regulations across Asia conducive for ETF launches?
From country to country, it's very different. Singapore has been very successful in getting the rules changed and the market has more than 20 listed ETFs already. I was talking to the president of the Philippine Stock Exchange and it looks like he's going to have the same challenges that Taiwan had, which is getting numerous regulations changed before getting any ETF out. The Philippines is making progress but I don't know what stage they are at.
What are the themes or strategies that you expect to come out in future ETF launches?
Japan is still a complex place. The exchange wants to have all kinds of ETFs and it has encouraged the domestic managers to bring them out. Many of these are large-cap and they overlap each other a great deal in terms of coverage. This environment-themed ETF we are working on will be the first the first theme-based ETF in Japan. We have to realise that because of the difficulties of cross listing and the difficulties for foreign managers to set-up and operate ETFs in Japan, there's a lot of ETFs that are being sold here that are not listed here. There's a great deal of trading out of Japan into American ETFs, some form Europe and some Asian ETFs including the iShares FTSE/Xinhua A50 ChinaTracker in the Hong Kong exchange. There are sales channels in place for those.
What about product innovation trends in other markets in Asia?
If you look at the stock exchanges in Asia, they operate in different hours. There's been a lot of talk about Asean trying to have an Asean board where investors from those different markets can invest across each of the markets. I think it will be quite a challenge to get that set-up.
There are a lot of restrictions across borders. There is limitation in how much investors can invest outside of their own country. Within Asia, I see a lot of pockets, a great deal of interest in investments, but because of these cross border regulations, it makes it difficult for local fund managers to develop Asian businesses. So the foreign managers come in because they may already have a Ucits platform in place and they are selling those products here. The local managers don't have a Ucits platform and they don't have the bandwidth to set up operations in various markets in Asia. I have suggested to exchanges that Asia should have some kind of a Ucits rule that can open up the region to funds.
Why is this issue of particular importance for you?
I think it's important from the responsibility that FTSE has. We spend a lot of time to make sure that our indices are tradable, liquid, and are meeting the needs of investors. When I see restrictions from local fund managers not having the ability to really get out there and sell because of these various restrictions, it is an impediment to my business as well as theirs. The major local fund managers in each market are attempting to develop their expertise in ETFs -- they are starting with their home market and they want to move out into other markets. They need to have the regulatory structure in place to allow them to work cross border and that's where they are finding many restrictions. Just to get an ETF structure in place requires a lot of work. Now we have to find a way to facilitate cross listing and open up the trading of various ETFs in various markets in Asia.
I am interested in getting Asian markets to develop some kind of UCITS platform because I believe it will assist local mangers access the different investors and have a wider distribution for their products whether they are ETFs or mutual funds. I would put funds ahead of stock trading when it comes to efforts for cross listing simply because funds are a safer investment vehicle for investors going into their neighbouring market rather than chasing individual stocks and having the risks associated with that. Buying an ETF or a fund that invests in another market is certainly a much better first step.
Is there already a move to do this?
I think it is recognised by a lot of people that there are regulations that are prohibitive in terms of developing cross border product launches.
Is this feasible, given the current resources and expertise of the regulators and exchanges?
One area where this might come together is the Asean market. The level of cooperation in various markets is still very different. Some of the regulators are looking at Ucits platforms quite carefully.
The April edition of AsianInvestor magazine will contain a feature on the ETF market in Asia.