Thailand’s array of locally-listed exchange-traded funds (ETFs) looks likely to expand this year, courtesy of a new arrangement with Hong Kong. However, more steps need to be taken to lower the costs and improve the efficiency of the country's passive index products before they capture more investors’ attention, say the local regulator and investors.
As part of its effort to enrich the product mix, Thailand’s Securities and Exchange Commission SEC) and Hong Kong’s Securities and Futures Commission are planning to sign an agreement on mutual recognition of funds, including ETFs, by the second quarter this year. That would allow a much broader variety of funds to become available to Thai investors.
Jomkwan Kongsakul, the assistant secretary general of the SEC, emphasised that it is seeking to expand investor options and has no favouritism over the products when making such a forecast.
“We cannot judge which one is better, between the active or passive, our job is to offer choices for managers and investors,” she told AsianInvestor in an exclusive interview.
However, Jomkwan said the local capital market is likely to see the listing of more ETFs as fund managers are able to offer more products that track overseas indexes.
“It’s a great choice to get returns for investors and asset managers because they don't have to do stock selection,” she said, “They don't have to do due diligence in each companies in overseas countries that might be hard for them because they don't know those companies well.”
Currently, six issuers offer a total of 17 ETFs in the local stock exchange. They have a combined AUM of Bt17.4 billion ($550.1 million). The majority are Thai equities-focused, while the rest track foreign equity and commodity indexes such as gold. In contrast, Hong Kong’s bourse has 128 exchange traded products listed, with a combined market capitalisation of HK$338 billion ($43.4 billion).
However, more work will need to be done than a deal with Hong Kong for ETF products to gain the attention of Thailand's institutional and retail investors alike. The senior investment executive of a Bangkok-based life insurer said the local ETF market is small, and that asset managers haven’t been able to create products that are big and liquid enough for asset owners to invest in.
“For us, it's very small, because we tend to be stock pickers…so if you see ETF allocations it has to be foreign allocations,” he added.
He added that most of his firm’s equity allocation is outsourced as active mandates. “If there are big and liquid ETFs, we might consider in the local market. But so far, that hasn't been a successful one yet.”
TIME FOR REFORM?
Vasin Vanichvoranun, executive vice president of Kasikorn Bank, agreed that size was the main constraint for Thailand's ETF market, given that ETF assets accounted for just 0.3% of the AUM of mutual funds in the country as of January end.
By comparison, the market capitalisation of exchange traded products in Hong Kong accounted for 0.9% of its far larger stock market.
The paltry size is partly due to the fact that retail investors – who account for the largest part of the domestic market – prefer direct stock investments, and active fund management has still been able to generate alpha, Vasin asserted.
Indeed, retail investors across much of Asia have tended to favour investing in active equity funds over passive alternatives. This preference can be traced in part because the banks that dominate fund distribution heavily promote active funds, in return for trailer fees that often top 100 basis points. ETFs, in contrast, don't offer such rewards, and thus get less emphasis.
This is a potential differentiator that ETFs could take advantage of. Morningstar found in a 2016 report that "the expense ratio is the most proven predictor of future fund returns". In other words funds that have more fees attached are less likely to outperform.
ETFs can typically take advantage of this, due to their miniscule fees. However, many of Thailand’s current current crop of ETFs are not exactly cost-efficient.
Close to a third of the ETFs listed on the Thai stock exchange five have an expense ratio of between 50 and 100 basis points. That’s expensive; the asset-weighted average fee for passively managed funds in the US stood at just 15 basis points in 2018, according to Morningstar.
Jomkwan admitted the relatively high costs are local ETFs’ “number one problem”.
“If you look at active funds and passive funds, active funds should be more expensive. But right now as you see in the market, there might be some [passive] funds that charge high fees,” she added.
Moreover, some Thai ETFs suffer from sizeable tracking errors and performance lag, a Bangkok-based senior asset manager said. Tracking errors occur when there’s a mismatch between the returns of the ETF and that of the underlying index it aims to replicate.
The introduction of new ETFs from Hong Kong may help to solve some of these issues. But it's likely that local asset owners will wait and see before committing much capital to instruments that have yet to impress.