Since the renminbi qualified foreign institutional investor (RQFII) scheme began last month, Chinese asset managers in Hong Kong have been working full tilt to launch mutual fund products.
Yet the big risk is that it ends up being a profitless business – at least in the retail class – on account of the high trailer fees for distribution of RQFII being demanded by banks.
AsianInvestor has learned from a number of Chinese fund management firms and securities companies that retail banks in Hong Kong are charging trailer fees in the range of 60-70% or more of overall management fees for RQFII products.
Take a securities company awarded a Rmb900 million quota, for example. If the management fee for a retail class product is 1.2%, and retail banks are charging 70% of that, the firm only has about Rmb3 million left. Subtract marketing expenses and lawyer fees, and there’s no profit.
As of January 19, the Securities and Futures Commission (SFC) had approved 17 RQFII funds for distribution in Hong Kong. Most Chinese asset managers treat RQFII funds as their flagship retail product in Hong Kong and prefer to work with banks with a deep renminbi deposit base.
But the top five banks (HSBC, Standard Chartered, Citi, Bank of China and Bank of East Asia) control 70% of fund distribution in the city, and are not inclined to offer favourable terms for distributing RQFII products. Fund houses, meanwhile, prefer to work with the biggest banks and as such have little bargaining power.
“A lot of Chinese brands are not known in the market, therefore they need to have bigger marketing money to promote those brands,” says Cheeping Yap, head of securities and fund services for Citi Hong Kong. “So banks charge higher trailer fees and allocate part of the money for advertising.”
Chi Lo, chief executive of HFT Investment Management, points out: “RQFII is a good start for us, but it is not our bread and butter because the Rmb1.1 billion quota we got [from the State Administration of Foreign Exchange] is still very small compared with the total AUM of more than $3.6 billion we manage in Hong Kong, the bulk from QFII sub-advisory business.”
That said, asset managers see the long-term opportunities provided by the RQFII programme, most notably among institutional investors.
Ma Jun, CIO of fixed income at E Fund, notes: “Long-term we will target institutional investors because the bulk of offshore renminbi will be in the hands of foreign central banks and trading partners with Chinese companies. There will eventually be a large institutional market.”
Meanwhile, increased international investment via RQFII into China’s onshore bond market is likely to have an impact similar to that which the qualified foreign institutional investor (QFII) programme had on the A-share market, reckons Daniel Li, CEO and CIO of Guosen Securities (HK) Asset Management.
“The A-share market was an isolated market before [QFII was introduced in 2003], but now it shows higher correlation with overseas markets, especially the US and Hong Kong,” Li notes.
“Currently the onshore bond market is still isolated. But RQFII has opened a door for investors to observe the pricing mechanism in the overseas market and will drive fund managers to rethink their investment approach.”
(A full article on the RQFII scheme will appear in AsianInvestor‘s February issue).