Are you selling the right funds?

Data

Hong Kong investors have tended take a pass on the sub-asset classes that are likely to continue outperforming.

For the first time since 2008, retail fund net sales in Hong Kong, which also include SFC-authorised products sold by private banks, became negative in 2018, according to data from the Hong Kong Investment Funds Association (HKIFA).

Source: Citi (click to enlarge)

Stewart Aldcroft, chairman at Cititrust, believes that one of the factors for the negative net sales was “extreme turnover” of products in the SAR, especially from mainland investors, which account for at least 35% of fund sales in Hong Kong.

“Fund companies, especially those that have not set up in Hong Kong, [might say] they don’t want that business because it is too volatile,” he said at a briefing organised by the HKIFA.

North America equities have tended to outperform in recent years, yet fund sales have only accounted for 3-4% of total equity fund sales

Stewart Aldcroft, Cititrust

“I tell them they are wrong. If you are new to the Hong Kong market, and you’re going to offer something that is different from what is in the market, then people are willing to switch.”

He believes that looking at historical sales data of the major fund categories should help managers know what the market is looking for.

“If you look at the sales over the last 15 years, it’s a way in which to forecast where the market is going next. Balanced funds [or mixed-asset funds] are currently probably the most successful group across the range of funds.”

Source: Citi (click to enlarge)

Buying the right equity funds

Aldcroft believes that investors are not buying the right sub-asset class.

He pointed out that North America equity fund sales accounted for only 3-4% of total equity fund sales in the last few years.

“And what has been the best market in the last year? North America.”

Last year people put a larger proportion of money in global emerging market equities, which were in negative territory.

“One of the problems [in Hong Kong’s fund industry] is that many people buy the wrong fund, therefore they don’t get the potential return that the market can offer. Whether that is the problem of the banks as distributors or fund houses as promoters, we have to work it out between us.”

 

Source: Citi (click to enlarge)

Aldcroft added that fund managers should offer investors more global solutions, especially that 35% of fund sales are coming from mainland investors in Hong Kong.

“Our opportunity as an industry when we sell our products into the mainland is to offer them choices. No mainlander will ever buy a China equity fund. And yet, there are people who have been trying to make that sale.”

MRF products

Aldcroft believes that the case is similar for Hong Kong-domiciled funds sold in the mainland (northbound funds) via the Mutual Recognition of Funds (MRF) scheme.

“What you are seeing is that the choice of funds is not the most inspiring if you look at where investment returns have been made. But this is what has been allowed by the regulator,” he said.

In total, there are 18 northbound funds on the MRF, according to data from Citi. Only two of them invest in the global markets, while the rest invest in Asia-Pacific, Hong Kong and Greater China markets.

Aldcroft added that some foreign asset management firms that have joined the MRF scheme have found it difficult to gather assets.

“One of the fund houses successfully got on an online platform. They gained 200,000 investors very quickly, but the average size of a deal is RMB 100 ($15).

“You can imagine how difficult that must have been for them to realise that they are not going to get the volume they were hoping they would get.”

However, northbound funds have gained more traction than China-domiciled funds sold in Hong Kong (southbound funds). Since the MRF programme began in 2015, net sales for northbound funds are nearly double — RMB 9.1bn ($1.38bn) — compared to RMB 470bn net sales for southbound funds, according to data from the State Administration for Foreign Exchange (SAFE).

In total, there are around 50 SFC-approved southbound funds, of which 24 have been launched.

Aldcroft believes there are various reasons for investors to not invest in southbound funds.

“Why would anyone invest in mainland invested funds at a time when the renminbi and the stock market is falling in value? And you can have done it anytime in the last 10 years anyway [with the various inbound investment schemes such as the QFII and RQFII as well as the stock connect schemes]?”

In addition, investors might find some of the southbound funds’ names confusing, with a number of them having “mixed securities” in their names.

“A lot of Hong Kong people would have difficulty understanding what these names mean.”

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