Perfect timing


BOCHK Asset Management sees business bloom

Chinese wisdom has always emphasised the importance of timing in successfully executing complex undertakings. And this was the first thing Dr. Au King Lun, CEO of BOCHK Asset Management Limited mentioned during a recent interview with Asia Asset Management:

“We couldn’t have asked for better luck in launching our business,” he says, referring to Bank of China (Hong Kong), (BOCHK), signing the revised “Settlement Agreement on the Clearing of Renminbi Businesses” with the People’s Bank of China (PBoC) in July 2010. The agreement has extended the scope of RMB business clearing service from Hong Kong SAR, Macau SAR and other ASEAN countries to all over the world, and has allowed the Chinese currency to become convertible outside of the Mainland with much less restrictions, as well as freely transferrable within the banking system for the first time. This occurred only two months after Dr. Au joined BOCHK.

According to Dr. Au: “This was the beginning that RMB started to go global. Since then RMB investment products have been introduced for retail and institutional clients alike. This facilitates the flow of RMB funds between banks and individuals, as well as within the banking system.” Shortly after that, the “dim sum” bond market saw rapid growth in terms of liquidity and number of issuers.

The market cap has grown more than 8-fold since December 2010, he points out. There are presently more than 1,000 issues.

A proactive first mover

Not surprisingly, BOCHK Asset Management saw a compelling first-mover opportunity, and moved decisively to make the most of it. In December 2010 the firm forged the world’s first offshore RMB bond index, “BOCHK Offshore RMB Bond Index”. Other foreign banks have subsequently followed suit.

“To help global investors to better capture the values in the offshore RMB fixed income securities as an investable asset class, we have established a partnership with FTSE to launch the new ‘FTSE-BOCHK Offshore RMB Bond Index Series’. The partnership was made public with a ceremony in April of this year, with the official launch of the index series on October 22,” says Dr. Au. “Unlike equities, bonds are traded over-the-counter (OTC) and there are no official trading records so prices are not immediately transparent. With the new index series, institutional investors would be able to analyse the new asset class and benchmark their subsequent investments.”

“FTSE is an established global index specialist. The strategic cooperation between FTSE and BOCHK brings together the global expertise and market knowledge of both partners in creating an industry standard benchmark for offshore RMB bonds,” says Dr. Au.

On being asked what he sees as the firm’s main growth drivers in terms of the services they offer to their clients, he says: “At the moment it’s still our RMB fixed-income products; of the US$3.7 billion we manage, US$1.8 billion is in this category.” But the company is expanding its offerings to appeal to an increasingly comprehensive global clientele/partnerships ranging from individuals to sovereigns, including the World Bank and institutional investors, such as major institutions in Hong Kong, Fubon in the Taiwan Region and Sal. Oppenheim in Europe. To sum it up, BOCHK Asset Management is an investment solutions provider with a RMB focus.

More broadly, Dr. Au offers some interesting perspectives on the Asian fixed-income space.

To him, it began in earnest after the 1997-1998 Asian currency crisis, which he characterises as a “blessing in disguise”. This is because it acted as a very sharp spur in getting many regional governments to restructure their economies and put in place reforms. The result? The quality of corporate bonds or corporate credits improved significantly, as did local currency government bonds.

This regained global investor confidence, crucial in a market where foreign investment remains the dominant engine of growth. Domestic investors remain mostly focussed on equities.

Many local Asian pension funds wouldn’t consider Asian fixed-income as a core asset. Rather they typically allocate to domestic equities and bonds at the core, augmented by global bonds with exposures mainly to the USD and Euro.

Regional insurance companies are something of an exception, however. Because of their need to match assets and liabilities, they obviously need to buy domestic bonds. But in doing so they also lean toward those which are US dollar-based. If their policies are in US dollars, or even HK dollars, the bulk of their investment is in US government bonds and US corporate bonds, Dr. Au explains.

Nevertheless, he adds: “The best selling financial product in the retail space right now, however, is not Chinese equity funds, not US equities, nor high-yield bond funds. It’s actually RMB insurance policies. Because if you believe in RMB appreciation, the long-term growth story of China, this is the best product to buy because you’re buying future RMB at the current exchange rate.”

However, Asian fixed-income has become more attractive to global investors who are looking for yield enhancement, and/or credit and portfolio diversification – plus as a means to tap into the ongoing Asian growth story.

The new element in Asian fixed-income is the inclusion of China. “The dim sum bond market is becoming more recognisable and it’s comparatively liquid – despite of its infancy. Presently, the dim sum bond market in Hong Kong is about $90 billion, whereas the Asian US dollar bond market amounts to about $420 billion. But the latter has been existing for around 20 years, whereas the dim sum bond market has developed for only two and a half years.

The development of the offshore RMB bond market has added another dimension to the fixed-income asset class. It provides professional investors with abundant investment opportunities.

Also, the offshore RMB bond market is being furthered developed globally. Sovereigns, international banks and corporations are issuing offshore RMB bonds now in Hong Kong, of course, but also in Singapore, the Taiwan Region and London – doubtless with more locations to come.

The attractions are many: yield pick-up in nominal and real terms; diversification through low correlation with other major bond markets; currency appreciation potential; other opportunities driven by the increasing use of RMB globally; and their offering a new tool for wealth management.

On RQFII, Dr. Au notes that there are currently quite a few products out there, many of which are ETFs. And he sees this as a logical development as RQFIIs offer not just Hong Kong investors, but global investors as well, a straightforward way to tap into the Mainland domestic market. What BOCHK Asset Management sees as its competitive advantage in this area is that they can offer investors their insights and skills in terms of securing stable returns.

“This goes back to my downside risk management philosophy. We believe there will be plenty of opportunities in Mainland China for both equities and bonds. The policy development underscores opportunity for investors if they are able to take advantage of it,” says Dr. Au.

In other words, one of this young firm’s strong suits is being able to provide global clients with a unique perspective, always crucial in capitalising on perceived opportunities there.

“We aim to establish ourselves as the China experts. And I think we are in a very strong position to do so given the resources the Bank of China Group has,” claims Dr. Au. As mentioned earlier, they have US$3.7 billion in assets under management. But what’s remarkable is their year-on-year growth. “We’ve grown roughly $1.7 billion (or approaching 85%) over that time,” he adds.

As to how he compares offshore and onshore markets, Dr. Au says: “With the onshore market, I think you have to invest in government bonds, because they represent the best quality and their yields are higher than the ones issued offshore. But for corporates, then I think you have to choose the offshore markets; you get paid for the credit risk.”

He continues: “We are benchmark aware, but not benchmark driven. What that means is we have to know where the market is going. But we shouldn’t be led by the market; we must always try to anticipate. But that said, we have another view as to how we manage our portfolio in practice: diversification through concentration. It’s contradictory in a sense, but we think that simply having broad diversification doesn’t add value per se. Nowadays, markets are highly correlated, and what you need to do is to diversify your alpha sources and invest with conviction.

For more information, please contact:
BOCHK Asset Management Limited
32/F, Bank of China Tower,
1 Garden Road, Hong Kong
Fax: (852) 2532 8216