GF International Investment Management, the Hong Kong subsidiary of GF Fund Management, launched its first renminbi qualified foreign institutional investor (RQFII) mutual fund last week, a fixed income strategy.
The firm also recently signed a memorandum of understanding (MoU) with a Hong Kong bank to act as its RQFII adviser, and plans to roll out RQFII balanced funds and an RQFII segregated accounts business. Nathan Lin, CEO of GF International, declined to offer a timeline for the latter two initiatives.
Since obtaining its RQFII licence in August 2012, GF International has received Rmb2.4 billion ($393.7 million) in RQFII quota across three batches. It will use Rmb800 million for the GFIIM China RQFII Bond Fund, which will invest at least 70% of its assets in China onshore government debt, quasi-government debt or corporate bonds rated AA or higher.
“We think it’s a good time to enter China’s onshore bond market, as the government bonds and quasi-government bonds show attractive risk-adjusted returns, compared with corporate credits and offshore bonds,” notes Lin, who joined the company in March to drive its RQFII business.
Mainland government bond yields currently range from 4-5%, while financial bonds and corporate bonds rated AA are yielding 5-7%, says Lin. Offshore-issued RMB bonds – which the firm will not invest in – are yielding around 4%, according to HSBC.
The fund will also not buy convertible bonds, as they do not provide sufficient liquidity, Lin says.
GF International is fundraising for the strategy from November 18 to December 6 and is approaching retail and institutional investors. Management fees are 1.25% for Class A shares and 0.75% for institutional investors. The fund will be distributed via six banks and two securities brokerages, all in Hong Kong.
The firm also plans to use its Rmb600 million of its RQFII quota for a balanced fund; Rmb200 million to invest directly in equity and fixed income securities; and Rmb800 million to develop a segregated accounts business.
Lin also sees opportunities for an RQFII advisory business, particularly for when the RQFII programme extends to London and Singapore. China’s regulators will make Rmb80 billion in RQFII quota available to UK institutional investors and fund houses and Rmb50 billion to those in the Lion City.
To exploit the advisory opportunities, GF International has already signed a memorandum of understanding with a local bank in Hong Kong whereby it will act as the latter’s RQFII adviser as regards investing in the mainland. Lin declined to name the bank, as the paperwork has not been signed.
There are no plans to list an RQFII ETF however, as the markets are saturated, Lin says. “RQFII ETFs are passive investment tools which replicate index returns, [and] the products tend to be very similar,” he says. “As a result, the early birds [in launching RQFII ETFs] will have advantages, while it is not easy for latecomers to gain market share.”
GF Fund Management is China’s sixth largest fund house with Rmb140 billion in AUM as of September 30.