MRF northbound funds lose half of assets in H1

First half 2018

Source: SAFE

The China-Hong Kong MRF programme, launched in 2016, allows cross-border trading of registered funds between the mainland and the SAR.

The net outflows for northbound funds (Hong Kong-domiciled funds sold on the mainland) in the first six months was RMB 2.65bn ($380.9m), data compiled by SAFE shows. The figure compares with RMB 4.69bn of total net northbound inflows for the full-year 2017.

June alone recorded a net northbound outflow of RMB 1.47bn, which is the largest single-month asset loss since the inception of the programme.

Germaine Share, associate director for manager research at Morningstar, believes the severe outflow of the approved northbound funds follows the trend of the broader market.

“The reasons for the MRF programme suffering an outflow is reflective of broader market conditions. If you look outside of the MRF scheme, you will see that bond funds have been suffering outflows so far this year,” she said.

Share added that within the MRF, the JP Morgan Asian Total Return Bond Fund takes up roughly 80% of turnover in the northbound direction. She suggested that outflows were likely driven by that bond product, however, Morningstar does not have outflow data available for individual MRF funds.

In terms of total global outflows, the JP Morgan bond product lost 30% of AUM since January, according to FE.

China’s overall fund market, outside the MRF, also had net outflows in the first half. The market is driven by so-called cash management products, which are money market funds and short-term bond funds. Excluding these two categories, the total onshore market had net outflows of -7.8%, according to Morningstar data.

Approvals in queue

Share believes the MRF platform serves as a long-term game for the managers of Hong Kong-domiciled funds selling into China and believes more diverse fund strategies will become available for domestic Chinese investors.

“Over this year, more funds are getting approved by Chinese regulators. Although Asia-focused strategies dominate the approved list for now, I would expect more diversified choices being approved going forward.”

She added that niche strategies such as thematic products would appeal to domestic investors, who have little choice outside of standard equity and bond funds.

Despite poor sales performance, fund managers of Hong Kong-domiciled products continue to seek approval to distribute funds via the passporting scheme.

The latest application was submitted by JP Morgan AM for its Pacific Technology Fund. The fund, incepted in 1997, had an AUM of $186.2m at the end of June. Over the trailing three years, the fund returned 17.15%, outperforming the sector (14.4%) and benchmark MSCI AC Pacific Information Technology Index (17%).

Nine applications are in the queue awaiting approval to sell funds to domestic investors. They include funds managed by Haitong International Asset Management, HSBC Global Asset Management and Value Partners.

Performance of MRF-approved northbound funds

Source: FE, in US dollar terms.