Hong Kong’s lure as an asset management hub remains robust, as Chinese institutions increasingly set up shop there looking to allocate offshore, and the amount of capital invested outside Asia by firms in the city posts strong growth. But investors seem to have turned more wary this year.
These are among the findings of the latest annual asset and wealth management activities survey by the territory's Securities and Futures Commission (SFC).
Asset management and fund advisory business in Hong Kong grew by 23% to HK$17.511 trillion ($2.242 trillion) in calendar-year 2017 amid a global economic upswing.
Meanwhile, wealth management assets stood at HK$7.812 trillion as of end-2017. The SFC did not provide a comparative figure for last year, as it has extended the survey scope this year to include client accounts managed or served by Hong Kong relationship managers of licensed corporations and registered institutions that are part of a larger banking group.
However, delving deeper into the survey is informative about industry trends – including that fears about a potential market crash are seen to be rising.
CASH AND MONEY MARKETS REBOUND
The amount of assets in cash and money markets almost doubled last year to HK$809 billion from HK$439 billion, reflecting increased investor caution in the face of market uncertainties (see figure 1). This represents a rebound in capital allocated to these assets after AUM halved from HK$928 billion in 2016.
“There certainly appears to be a gathering momentum around the theme that we are headed for a market crash at some point over the next 12 months,” said Effie Vasilopoulos, global co-leader of the investment funds, advisers and derivatives group at law firm Sidley Austin in Hong Kong.
“The move to cash and money markets always precedes this kind of event [a market crash] in my experience,” she told AsianInvestor.
Among the main reasons she cited for such caution were investor concerns over US-China trade tensions and fears that Britain may be heading for a hard exit from Europe, amid a damaging split in the UK government.
GLOBAL ASSET GROWTH
Still, Hong Kong’s status as an international asset management hub continued to rise last year. AUM invested outside of Asia Pacific by fund managers in Hong Kong recorded a particularly strong increase, from HK$2.07 trillion to HK$2.75 trillion.
As of end-2017, non-Asia-Pacific assets accounted for 32% of the HK$8.579 trillion managed in Hong Kong, up from 29% in 2016 (see figure 2).
This rise also reflects the well documented steadily rising levels of international diversification in portfolios. Still, China and Hong Kong are the dominant investment destinations for fund managers in the city, between them representing 49% of all assets managed locally last year.
MUTUAL RECOGNITION GAINING TRACTION
Indeed, proponents of the Hong Kong-China mutual recognition of funds (MRF) scheme will be heartened by the continued growth of assets in northbound funds (China-domiciled products offered in Hong Kong) and southbound funds (Hong Kong-domiciled funds offered in China).
Assets in the current 50 southbound MRF funds attributable to Hong Kong investors shot up by 307% to Rmb456 million ($67 million) in the year to March 31, 2018. AUM in the 15 northbound funds grew by 59% to Rmb12.17 billion.
These figures reflect the continued rise in demand for China outbound investment compared to that for foreign inbound investment, Vasilopoulos told AsianInvestor.
For the time being, she added, this is likely to mean Beijing will keep capital controls in place on outbound flows and will put in place more incentives for inbound investment.
CHINESE MANAGER INFLOW CONTINUES
Meanwhile, the number of mainland asset and wealth managers obtaining licences in Hong Kong has been growing steadily in recent years, as Chinese firms look to invest more capital overseas. The number of licensed corporations and institutions set up by mainland-related firms in the territory increased 12% to 334 from 298 last year.
Moreover, the amount of money managed in SFC-authorised funds by mainland-related groups is also on the rise, increasing 27% to HK$295 billion last year. That figure has doubled from HK$145 billion since 2013.
CORPORATE PLANNING ON RISE IN HK
Likewise, there was a rise in in the number of AM and WM staff, by 5% to 37,062 in 2017, with staff engaged in non-sales-and-marketing activities accounting for by far largest proportion (68%).
By far the biggest rise in staff numbers in Hong Kong’s asset and wealth management segment last year – in percentage terms – was in corporate planning and business management. The number rose 37% to 893 from 650 (see figure 3).
This trend reflects a growing focus on driving business efficiency, noted Vasilopoulos. “Much of this is driven by the increasing cost of regulatory and operational compliance, in combination with downward pressure on fees.”
The total number of corporate planning and business management staff still only represents 2% of the total AM and WM headcount in Hong Kong.
But it seems no coincidence that the increase in that area comes at a time of consolidation and retrenchment in the investment industry. Mergers and Asia cutbacks have become increasingly common in the past few years, and more are expected.