Hong Kong’s Hospital Authority is lining up potential RMB bond and A-share managers for its provident fund scheme after issuing an RFP as it awaits receipt of its QFII quota.
Further, the authority – which manages $5.5 billion in pension money for 33,000 members – has just shared a $250 million mandate between two newly appointed US small-cap managers to replace their former US small mid-cap mandate managed by TCW, AsianInvestor can reveal.
Heman Wong, executive director of the Hospital Authority Provident Fund Scheme, confirms that it sent out its request for proposal for onshore Chinese securities management last week after receiving its qualified foreign institutional investor (QFII) licence on January 31.
“We have talked to Chinese investment houses and to those with onshore joint-ventures and we are open to both,” he says. “We do not want to exclude anyone at this stage that can potentially give us good returns and service.”
Wong notes that because China’s onshore fund management industry is still not well covered by consultants, the authority is having to do its own due diligence, including site visits.
He stresses he is looking for fund houses with experienced managers who can demonstrate a sound investment process and strong past performance in managing A-shares and RMB bonds.
And given that QFII investors are required to fund their investments within six months of receiving a quota, Wong admits that the authority has no time to lose in terms of its preparations.
“We have a due diligence discipline that we go through for every manager before we do the funding and this is generally a three-to-six month process,” he states. “We are trying very hard to control this process within three months and hopefully that will give us enough time to do the funding properly before expiry of the six-month limit.
“We are also an ORSO [Occupational Retirement Schemes Ordinance] scheme and we do a monthly rebalancing process, so I am working on the assumption I only have five months to work with.”
Wong explains that the authority is seeking exposure to China’s onshore securities market in response to member demand, as well as out of a desire for diversification.
“Many times we have been asked by our members why we are not investing in China and now they are very cheerful that we have a licence to do so,” he says. “This is a market they want to invest in because they want RMB exposure.
“We strongly believe that China is where the growth is going to come from. And from a portfolio perspective it is a very good fit and will enhance our risk profile from a statistical point of view.”
On the question of whether economic growth is necessarily linked to stock market performance, Wong replies: “We believe over time there is a strong link. Fundamentally if an economy is doing well you see the stock market go up, and vice-versa. The key is to choose good managers.”
But Wong acknowledges that many Chinese fund management companies have been finding the going tough in terms of both profitability and manager turnover.
“This is a new market and this [turnover] will go on happening,” he agrees. “It is something I will have to look into very carefully before I decide on which manager to choose.”
Separately, Wong confirms that the Hospital Authority transitioned its US small-cap portfolio towards the end of January this year.
He does not give a detailed explanation of why it changed from US small-mid cap to US small-cap and says only that the $250 million mandate was shared roughly equally between two US-based fundamental managers.
“It is sensitive because of the stocks they are buying into,” he says. “We considered the size and style of the managers and for that reason we have chosen two.
"But we have not had any major setbacks or big issues in terms of succession or difficulty in buying or selling stocks, so the transition has gone reasonably well.”
Wong adds that the Hospital Authority has three passive equity mandates at present, one linked to US large-caps managed by BlackRock, one to Japanese large-caps and one to a fundamental Hong Kong/China index both managed by State Street. “If you are not confident your manager is going to add a lot of value, then you do not want to pay more fees,” he explains.
On the fixed income side, Wong reveals that the Hospital Authority has investigated the merits of passive bond management but opted to stay solely with active fixed income managers.
At present its Global Aggregate bond portfolios are managed by Goldman Sachs Asset Management (about $600 million), Pimco ($700 million) and Brandywine ($350 million).
Overall the Hospital Authority Provident Fund Scheme engages a total of 24 external fund managers and operates six member choice funds.
About 55% of its AUM is allocated to 13 equity managers, while it has a 5% allocation to fund of hedge funds and the balance is in the hands of fixed income managers. It does have a small allocation to money-market funds, currency overlay and a legacy private equity portfolio.
Wong describes the authority’s 13-strong provident fund management headcount as humble. His deputy is Doris Ho, who leads a team of four analysts.
The biggest change in the scheme’s portfolio over the past few years has been to raise its home bias for Hong Kong equity from 20% to 25%. It has still not decided whether to place its QFII portfolio into this bucket or to create a separate China securities class.