Lyxor Asset Management is seeking to become only the fourth fund house to launch a physically backed RQFII exchange-traded fund listed on the London Stock Exchange (LSE).
The French firm, a subsidiary of French bank Societe Generale, has applied to launch the RMB-denominated ETF with both Chinese and French authorities.
Through its Chinese joint venture Fortune SG, Lyxor has received a $160 million RMB qualified foreign institutional investor (RQFII) quota from China's State Administration of Foreign Exchange (Safe) for this ETF. That would enable it to be physically backed, rather than synthetic. Lyxor separately received $100 million QFII from Safe in November 2011.
There are three physical RQFII ETFs on the LSE, finds London-based research house ETFGI. Hong Kong-based CSOP Asset Management and UK ETF provider Source jointly listed a physically backed Ucits RQFII ETF on the bourse this January, as reported.
It is the largest of its kind in London with $370 million under management, as at the end of June, by ETFGI numbers.
This product was followed days later by db x-trackers and Chinese partner Harvest Global Investments launching their CSI300 Index Ucits ETF ($199.6 million). Subsequently ETF Securities and E Fund Management listed their MSCI China A-Share Ucits ETF in London ($25 million).
If approved, Lyxor's new RQFII product would complement the firm's H-share ETF, which has 863 million euros in assets under management. Lyxor AM also has a synthetic CSI300 A-shares Ucits ETF listed in London with $61 million in AUM.
Lyxor is hopeful it will be able to list its RQFII ETF on the exchange before the end of this summer. However, any application for a product with RMB-denominated underlying securities is understood to be lengthy, with the need to convince the China Securities Regulatory Commission and Safe before finding and working with a custodian. Sources say the process can take more than six months.
Pierre Gil, chief executive of Lyxor’s UK business in London, is conscious that inflows from European investors may not be immediately strong for exposure to A-shares and RMB, but says this forms part of a longer-term plan.
“When we launch an ETF it is not just a market opportunity for a few months, it is a long-term idea to create a toolbox that will be useful for someone doing asset allocation,” he told AsianInvestor. “Maybe they will not need it this year, but next.”
He added he had been impressed by the pace of regulatory and market reform in China, which has quickened over the past three years. “While we want to be profitable in the short term, we also have to keep an eye on what will happen in 10-20 years. It is interesting how quickly things can change.
“I would say the big difficulty with China is still market access; it is not that easy for international investors to trade. But we know that someday MSCI will include China in its Emerging Markets index. When this happens we want to be there.
"At least we can build the product and when people want it, it will be there.”
Gil believes it would be easier for Lyxor to manage the liquidity of an ETF under the RQFII wrapper than QFII.
Lyxor delisted its 12 ETFs in Hong Kong back in 2011 amid a backdrop of tighter rules on, and greater scrutiny of, ETFs – particularly for synthetic versions, in a story broken exclusively by AsianInvestor.
The largest ETF listed in London that provides exposure to China's A-share market is the $491.6 million CSI300 product from db x-trackers and Harvest, which was listed in 2012.
Lyxor Asset Management had $117 billion in AUM as at the end of this June, 47.4% of which was invested into ETFs/indexing, 22.4% into structured investments, 18.5% into alternatives and 11.7% into active quantitative and specialised investments.