Taiwan’s Fubon Asset Management has stated that now is the perfect time to launch an ETF tracking China's A-share market despite market volatility after becoming the first firm on the island to receive regulatory approval for such a product.
The company, which was granted a $100 million qualified foreign institutional investor (QFII) quota earlier this year, has said it will list the ETF tracking the Shanghai Stock Exchange (SSE) 180 Index on September 26 on the Taiwan Stock Exchange. The IPO period will run from August 23 to August 25.
Fubon anticipates that the fund can raise total assets of around NT$3 billion – which would be right up against its $100 million quota limit – even amid this year’s stock market volatility.
China’s A-share market has been afflicted by investor pullbacks on the back of (and expectations of future) domestic tightening measures by Beijing to rein in runaway inflation and dampen property speculation, combined with broader global equity market uncertainty and turbulence. The Shanghai Composite has sunk 8% since the start of this year to close at 2,627 on August 15.
Nevertheless, Thomas Tsao Yu-fei, chairman of Fubon Asset Management, tells AsianInvestor that the time is right to launch an ETF tracking Chinese stocks.
“The housing policy, anti-inflation measures and tightening monetary policies have exerted downward pressure on the A-share market,” he concedes. “But I think the macro-control policies may be coming to an end. Inflation will come down, and the Chinese economy still has good growth potential.”
Tsao says that Fubon opted to take the ETF route to capitalise on in-house indexing expertise. It already runs four ETFs: Taiwan Technology, Taiwan Finance; Taiwan Eight Industries and MSCI Taiwan.
He adds: “Most of our competitors apply their QFII quota to their existing active equity funds, which can only invest 30% of their AUM in the A-share market according to Taiwanese regulation. But by launching an ETF fund we are not bound by this regulation.”
He says that the Shanghai bourse was the firm’s preferred option over its Shenzhen counterpart because it has “more well-established firms for first-time investors”.
He also points out that the SSE50, which comprises the exchange’s 50 largest market caps, is not its investment target. “The SSE180 is a better choice because it is significant enough in total market weight but includes some medium-sized growth companies, which we like,” he explains.
Taiwan’s Financial Supervisory Commission (FSC) has stipulated that Fubon’s new ETF must raise at least NT$600 million for inception, and not exceed NT$10 billion. Taishin International Bank is fund custodian.
But the ETF’s overall size will be limited by Fubon’s quota restriction. Tsao says the firm has seen great interest from large foreign institutional investors, as well as domestic life insurers and retail investors. “We have had a good volume of enquiry for the new ETF fund. The QFII quota of $100 million is far from enough,” he confirms.
Fubon is among the first fund houses in Taiwan to have received both a QFII licence and quota, along with Capital Securities Investment Trust.
Polaris Securities Investment Trust is also seeking to launch an onshore China-focused ETF – tracking the SSE50 Index – after receiving its QFII licence in March.