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Letter from Hong Kong, June 2024

Date added: 28 June 2024
  • FBC News ,  
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Stewart Aldcroft is a Hong Kong resident, veteran of the asset management industry and member of the FBC Advisory Council.

Since I last wrote this letter in March, it seems like it has not stopped raining here in Hong Kong. It is one of life’s stranger anomalies, that most Hong Kong people who have been to the UK, will talk about the weather and the frequency of rain there.

Yet in Hong Kong, on some days it can rain as much as London will get in a whole year!! And for people from Singapore, where it rains every day at around 4pm, they too have an impression that can differ from the facts. 

Regulatory updates and developments 

Over the last quarter, developments in the fund and asset management industry have been slow but significant. Probably the most interesting, for most readers, will be that the HK Securities & Futures Commission (SFC) has announced it is about to embark on a full revision of its Code on Unit Trusts and Mutual Funds. The current Code has been in place for at least 12 years, although a number of additions and revisions have occurred since 2012 to keep it reasonably up to date. Now the SFC plan to conduct a two-year public consultation, with a view to probably issuing a completely revised Code sometime in 2026 or 2027. Many observers welcome this, not least because it will be a chance to enshrine many of the industry requirements and practices.  

It is possible we will see opportunities taken to increase the range of fund products that can be offered to the retail investor. Clearly also, fund managers would like to see some changes to the various restrictions under which they operate. The industry needs to be vocal and forthcoming about what it wants. 

Also in April/May, the first crypto currency ETFs were launched in Hong Kong and received warm support. Previously there had been ETFs tracking crypto futures, now they are available to track the currency values. An initial analysis by one of the issuers, of the typical investor into their version suggests that the majority are relatively young, that the amounts invested quite modest, and that most who have invested were already investors in bitcoin or other crypto currencies.   

Cross border fund sales 

In previous Letters, I have written about the various cross border schemes, “connect” schemes, that enable investors in China to gain access to mutual funds in Hong Kong and for Hong Kong investors to have access to Mainland China mutual funds. These are Mutual Recognition of Funds (MRF), Wealth Management Connect (WMC) and ETF Connect. MRF has been around for almost 10 years, and has universally disappointed the industry with being so tightly restricted, slow to gain approval and ultimately leading to very low volumes transacted. In April China announced plans for a number of developments designed to support the securities markets in Hong Kong. One of these is to update and enhance MRF. This will be very welcome to the local fund management industry and it is hoped will lead to a significant increase in sales volumes. Expect announcements in late June or July for more details. 

Since February, WMC has also been enhanced, as previously noted, and this is now beginning to deliver the volume of fund sales that the industry had been hoping for. Product development has still been slow. Use of HK domiciled feeder or fund of fund products into UCITS, which is allowed, has yet to occur. This could prove very attractive for investors across the Greater Bay Area as a way in which to gain access to global securities markets. 

For both these schemes as well as ETF Connect, the overriding feature is that the products in Hong Kong need to be locally domiciled. This should not be difficult to achieve, but it seems many of the global fund managers here, who dominate with their UCITS products for retail fund sales, are very reluctant to add to the fund range. Perhaps once sales volumes rise even further, they will change their minds. 

“Open architecture“ fund sales by banks 

One of the most notable features of the success of the fund management industry in Hong Kong has been the extent of “open architecture” selection of funds by banks to use with their retail customers. For those with a long memory, this first started around 30 years ago, when Citibank, followed by Standard Chartered Bank created a fund selection team to analyse the funds available to them in the market and identify those they wished to support. The list was inevitably limited, with both banks prioritizing fund houses by size, scale, performance credentials, and deemed to not compete.  

This was well received by bank customers, as a result sales volumes rose substantially, and competing banks such as HSBC, Hang Seng, Bank of China and most others, adopted a similar “open architecture” policy.  

This was, to some extent to the chagrin of their own internal asset management businesses, who previously had believed they had a divine right of priority in fund sales within the same organization.  

By the 2020s, banks dominated the retail fund distribution markets in Hong Kong, Singapore and some other Asian locations. Their market share currently exceeds 70%, according to recent HK SFC statistics, with insurance companies having 20% and the rest, such as wealth managers, with less than 10%. 

A notable feature of the most recent sales statistics however, has been the extent with which the largest banks, for fund sales, i.e. HSBC and Hang Seng, have reverted to selling own label products, in preference to the wider choice in the market. The notion of “open architecture” appears to be under some stress. It will be interesting to see if bank customers fight back. 

eMPF launches in June 

The Mandatory Provident Fund (MPF) market in Hong Kong was first launched in 2000. It has grown to more than US$200bn in size, offering around 400 different fund choices via 14 separate providers. An ongoing claim by the regulators has been that the fees charged to administer the products are too high, thus leading to lower returns, to which the counter argument has been that the high fees are necessary because of the extensive administrative burden incurred through what has been a largely manual processing business.  

To challenge this, the HK Government initiated the idea that a central platform should be developed that would take away the admin processes from providers and lead to significantly lower costs.  

For the last 3 or 4 years, there has been the ongoing development of a platform onto which the entire Mandatory Provident Fund industry will be placed. This is known as eMPF. We now know that the first products to be switched to the platform will be from a very small provider, YF Life, and this will occur on 26 June. In July the China Life product will be switched, and before the end of 2024 there will be another 3 product providers switched to the platform. It is intended that the entire MPF industry will be switched to eMPF by the end of 2025. 

A recent demonstration of the platform to the industry has yielded positive comments, and this has now led to a claim by the MPFA that its aim is to have the world’s best retail pension product platform. 

What is clear also, is that once the entire industry is on the eMPF platform, members of MPF schemes will have the full range of 400+ funds available to choose from and no longer will they be limited to only those funds available from the MPF provider they have selected. Indeed, the role of the provider will probably eventually evaporate. But the greater choice of funds means a more competitive market, with a number of global fund houses, that currently don’t provide their fund products to the market, expected to enter. This is a big, captive market that has the potential to deliver volume growth for market participants.  

Stewart Aldcroft 

aldcroft@netvigator.com