Novel RQFII bond fund expected to spawn copycats

HFT Investment Management has launched the first RQFII fixed income fund to invest in RMB bonds issued both on the mainland and offshore. More are forecast to follow.
Novel RQFII bond fund expected to spawn copycats

The Hong Kong arm of HFT Investment Management yesterday became the first to offer an RMB fixed income fund investing in both onshore and offshore high-yield bonds.

Launched under the renminbi-denominated qualified foreign institutional investor (RQFII) programme, the product is expected to be the first in a series of similar launches, with other fund houses understood to be interested in this kind of product.

Previously RQFII funds only invested in the onshore market. But clearly this will give investors greater diversity in the RMB-denominated high-yield bonds they can access.

The HFT (HK) China High-Yield Bond Fund will invest in debt issued by Chinese state-owned enterprises and private companies, as well as offshore Chinese multi-nationals and international companies.

HFT received Rmb800 million ($131 million) in RQFII quota from China’s State Administration of Foreign Exchange (Safe) in May, which it will use to invest in bonds issued on the mainland. After adding the offshore portion, the firm is aiming to raise up to $1.3 billion for the fund in total.

It must have at least 60% of its assets allocated to onshore debt instruments, including convertible bonds authorised by the China Securities Regulatory Commission (CSRC), with no more than 40% invested in bonds issued in Hong Kong.

Jelle Vervoorn, chief executive of HFT Investment Management (HK), notes that the first batch of  RQFII fixed income funds are generic, with very few focusing on high-yield bonds. “There is absolutely appetite for high yield,” he argues.

According to the fund prospectus, 70% of the fund’s AUM will be invested in high-yield bonds that are below investment grade or unrated by international rating agencies. Chinese onshore corporate credits are normally only rated by domestic agencies.

This product will also be allowed to buy urban investment bonds – debt instruments issued by local government financing vehicles that market players often avoid because of their high risk of default.

Vervoorn notes the fund will not necessarily invest in these instruments, but adds “we don’t want to exclude it”.

Although the fund will invest in convertible bonds, it will not exercise the conversion rights as it is a pure fixed income strategy, according to its prospectus.

The fund will be available for both retail and institutional investors in Hong Kong, whereas in Singapore, it will be offered to high-net-worth individuals via private banks' distribution platforms.

It will be traded in six currencies – yen, renminbi, US dollars, Singapore dollars, Hong Kong dollars and euros. It will provide daily liquidity and charge management fees of 1.25%.

HFT Investment Management boasts $6.4 billion in total fixed income assets.

Separately, Singapore’s two sovereign wealth funds were among the latest to receive qualified foreign institutional investor (QFII) licences from the regulator CSRC last month.

Temasek Holdings’ investment fund, SeaTown Holdings International, and ST Asset Management both received permits. So did Temasek Fullerton Alpha Investments, Fullerton Fund Management, and Government of Singapore Investment Corporation.

Other October recipients included Thailand’s Government Pension Fund, which oversaw $19.7 billion as of March; Singapore firm CSAM Asset Management; US-based the Ford Foundation; China Life Franklin Asset Management’s Hong Kong division; and Korea firm UBS Hana Asset Management.

Meanwhile, RQFII licence recipients included JF Asset Management, Mirae Asset Global Investments (Hong Kong), Shanghai International Asset Management (HK) and China Everbright Assets Management in October.

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