ETFs in Asia: Too much of the same?

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Hong Kong-based Premia Partners believes ETFs with thematic variety can gather assets and the firm expects to launch up to six Asia-focused smart beta products this year.

ETFs in Asia: Too much of the same?

The firm’s strategic focus is on Asia and smart beta ETFs. Along those lines, Premia expects to launch up to six products in 2018, mostly Hong Kong-domiciled funds, according to Rebecca Chua, managing partner.

Hong Kong, however, has seen a spate of ETF delistings in 2017 from firms such as Mirae, Deutsche AM, Samsung AM and mainland asset managers including CSOP and China AMC and China Universal.

Premia had a different experience. In October, the firm launched two China ETFs using a factor approach, each of which gathered assets quickly. Currently both have roughly $64m in AUM (RMB 400m), according to FE data.

“Most new ETFs in the US usually start small at inception, between $2m-$5m,” Chua said. “I was surprised [at the gathered assets], but it shows you there is demand.

“In Hong Kong, they say there is no opportunity and many de-listings of ETFs.  But the ETFs for sale in Hong Kong are generally the same. How can it be that this is the maximum potential we have? Look at the US with different thematic strategies that really express an investment view.”

All providers of China-focused ETFs tend to take exposure to the A-share index, with a heavy weighting in Tencent and Alibaba and China’s big state banks. Chua believes they miss healthcare, environmental, AI and robotic opportunities, “quality companies that are really contributing to the GDP”.

Moreover, many China ETFs are from mainland-based firms. David Lai, partner and co-chief investment officer, said that Chinese firms tend to tie product development to regulatory policy and not market demand.

“We’re trying to bring some alternative choices to the market with products that are developed after talking with clients,” Lai said.

Cross-border links

Of Premia’s four partners, Chua and Alexsey Mironenko were previously at Blackrock​, Lai was at China AMC and Laura Lui led the quant team at ICBC Credit Suisse, a joint venture firm.

In addition, Chen Zhiwu, professor of finance at Yale University and Jason Hsu, founder of Rayliant Global Advisors with expertise in smart beta strategies, were brought in as advisers.

The firm also recently inked a joint venture with US-based asset manager Wisdom Tree. The two firms are discussing joint product development, but in the near-term the link-up aims to provide Asian clients access to US products, Chua said.

At Blackrock, Chua managed the relationship with the firm’s joint venture partner, Bank of China. Later, she worked in Credit Suisse’s joint venture with another huge state bank, ICBC.

One takeaway from her experience in cross-border joint ventures was to address Asia. “The [foreign partners] were very focused on the US and Europe, where they were most successful, and the Chinese partners wanted to focus on the mainland. That’s where I saw the opportunity.

“The challenges are that you need to be market maker, do a lot of investor education, look at the entire liquidity of the underlying portfolio and determine what strategy can be expressed in the form of an ETF. The cost of operating an ETF is still high in Asia.”

The firm’s closest competitor is perhaps Mirae Asset, which also distributes ETFs in Asia. The two ETF giants – Blackrock, which markets its smart beta in Asia, and Vanguard, loom in the background and one day could decide on a massive product expansion in Asia.

But Chua believes the big global firms typically don’t move in that way. “They watch and take a gradual approach.”

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