UBS Asset Management is looking to ramp up its China fixed income offering by adding credit specialists, moving to register funds to invest in the local interbank bond market and developing Hong Kong-domiciled products for the cross-border mutual recognition of funds (MRF) scheme.
The main reason for this is their lack of familiarity with the market, rather than because they are waiting for Chinese bonds to be included in the main global fixed income indexes, said Ashley Perrott, UBS AM's head of pan-Asia fixed income.
But neither issue affects his firm's thinking, he told AsianInvestor. “We are going in anyway. [China] is the third biggest bond market in world, and in five years it will be the second biggest. It will probably double in size [from Rmb63 trillion ($9 trillion)] in the next five years.”
Hence UBS AM's moves to expand its personnel, product range and market access channels.
Credit analyst Vincent Lam joined UBS AM in December, based in Hong Kong and focused on China-based issuers. He moved from from Manulife AM to bring the Asian credit research team up to six, alongside five Asia portfolio managers.
And UBS AM plans to put two or three more investment staff onshore – probably portfolio managers and traders – over the coming year, if its business plans play out as expected.
“Over time, as we start offering more onshore credit-type products, we will look to build the team out further,” added Perrott (pictured right).
The firm is already involved in onshore China asset management via its joint venture fund firm, UBS SDIC, and it has wholly foreign-owned entities (WFOEs) in both Beijing and Shanghai. It plans to obtain an investment management licence for at least one of the two latter entities.
UBS AM also plans to register funds to invest in the China interbank bond market (CIBM) but is in no hurry. It can already manage onshore China bonds through its quotas under the QFII and RQFII cross-border investment schemes.
“But we are also going down the direct access path, because it makes things simpler,” Perrott said. “We're some way down this path.”
UBS AM will make use of the CIBM for some of its Luxembourg Ucits funds, he noted, and for the Hong Kong-domiciled products it plans to launch. But it will not need such access for all of its bond funds. The firm already has two Hong Kong-domiciled products registerd for sales via the MRF scheme into China.
Challenges to entry
Perrott conceded that operational aspects can represent hurdles to entering the CIBM. “Investors want more comfort in respect of capital transfer, trade settlement, moving money on and offshore – this is all new for a lot of fund managers.
“We don't think of these processes as particularly challenging, because we went through the whole operational setup a few years ago, but there are still a lot of managers that haven't done this yet.”
Others also raise concerns over the transparency and availability of data on mainland credit, as well as about the rating system for onshore bonds.
Still, demand for mainland bonds will accelerate when they are included in global benchmarks.
But Perrott pointed out that indexes already exist – offered by JP Morgan, for instance – that include China and India and other markets with capital controls. Indeed, on March 1 a version of the Bloomberg Barclays Global Aggregate, a widely used fixed income benchmark, will be launched incorporating China exposure.
The question is now whether China will eventually be integrated into the standard Global Aggregate or the new benchmark is retained as a separate, add-on index, Perrott said.