Wealthy Chinese investors seeking to build diversified portfolios should consider using exchange-traded funds (ETFs) rather than ignore them, thinks a top executive at Noah Holdings.
Increasingly, the emphasis among Chinese HNWIs is to protect amassed wealth rather than chase continued profits, Kenny Lam, group president at the Chinese wealth and asset manager, said at the Inside ETFs Asia forum last week.
“Here, we see ETFs playing a role in client portfolios,” he said at the event held in Hong Kong in partnership with AsianInvestor.
One of the main risks he sees for China’s wealthy is that they don’t fully understand the need to diversify their assets globally. And those who do, don’t always know how to do so.
There is a structural need for clients to be exposed to global assets, partly because of currency fluctuations, he said -- although after the People's Bank of China dropped a pledge this month to allow market forces to determine the renminbi, others might argue that that risk has now receded.
But also because “it is a good idea to diversify and not have all your eggs in one basket,” Lam added.
Lam noted that one of the ways of gaining such global exposure is through ETFs.
It used to be tough to convince Chinese investors who could generate 25% to 35% domestically to invest in global markets, he said. But following bouts of market turbulence and a regulatory clampdown on speculative products, Chinese wealth investors have turned more cautious about their return expectations and are gradually embracing the idea of having more risk-adjusted investment profiles, he said.
A more measured approach is also seeping into local equity investing, which too is benefiting from rising ETF adoption, said CreditEase Wealth Management’s head of asset allocation strategy research, Lin Li. Speaking on another panel at the event, she noted how capital inflows this year into domestic-oriented equity ETFs rose even as the China A-share market dropped by 20%.
“When I look at the data in the past several years, the average growth rate of the ETF market is about 30%,” she said.
Outside China, Asian institutional investors such as insurers and pension funds have been more proactive in adopting ETFs to gain global exposure. Prudential Corporation Asia, for instance, is increasingly using ETFs alongside active strategies, especially for exposure to Europe and the US.
However, for the most part, HNWIs and their institutional counterparts – family offices – remain unconvinced about the merits of using ETFs.
In general, family offices globally allocate about 4% of their portfolios to ETFs and in China that proportion is even lower among family offices – at around 1% or less – said Noah’s Lam.
Last year, Noah Holdings handled $20 billion in trading flows for clients, but none of it was in ETFs, he said, underlining the low demand for ETFs among China's HNWIs.
The wealth manager is better known for private equity investing, but he acknowledged the investment limits of this asset class: “We cannot be doing $50 billion to $60 billion a year in private equity, so we are trying to ensure our client base is more exposed to more standard allocations [such as ETFs].”