Educated and enlightened
Category: Asia, Hong Kong, Global
By Daniel Shane
AAM ETF seminar gives attendees plenty of food for thought
More than 200 executives from Asia-Pacific’s top pension funds, insurance companies and other institutional investors gathered in Hong Kong to ascertain what the future holds for the ETF industry at Asia Asset Management’s 2nd ETF Seminar.
Under the banner Institutional ETF Investments: Opportunities and Challenges the one-day event at Hong Kong’s Island Shangri-La Hotel on May 15 featured keynote speakers and panels that examined themes including growth opportunities in mainland China, challenges of portfolio construction in a post QE world and ETF options trading strategies.
The morning’s keynote address was made by Romnesh Lamba, co-head of global markets at Hong Kong Exchanges and Clearing Limited (HKEx), who assessed the development of the territory’s ETF market, as well as its future direction.
Mr. Lamba pointed out that Hong Kong was now the second largest ETF market in Asia behind Japan, in terms of AUM, and third in regards to turnover. He also highlighted the market’s appetite for innovation when it came to ETF products.
“In 2014 we’ve already had five new listings. We’ve had our first Mainland onshore bond ETF, we’ve had our first RQFII ETF by a Chinese security firm, and we’ve had the first RQFII sector ETFs in consumer staples and healthcare,” Mr. Lamba explained.
During his speech, he outlined the growing importance of ETFs to HKEx as it seeks to become the stock market of choice for investors both inside and outside of China.
“We want to be the international exchange of choice for Chinese investors. We want to be their first port of call when they’re allowed to go offshore, and we want to be the Chinese exchange of choice for our international investors. It’s really the meeting place between China and international. Historically, we’ve done that through single shares and in some equity derivatives, but more recently with ETFs,” Mr. Lamba said.
Going forward, he said that HKEx would look to expand into incremental asset classes, providing examples including its launch of an RMB currency future and the acquisition of the London Metal Exchange as part of a plan to launch more commodity contracts in Hong Kong.
“That’s also important to ETFs, because today in Hong Kong ETFs are predominantly around equities, but if you look at other parts of the world the ETF underline goes into fixed income and currency, and also into commodities. We’re trying to build an ecosystem in Hong Kong beyond IPOs and single shares, and ETFs are a very important part of that,” Mr. Lamba said.
The second speaker of the day was Yang Jian, managing director and head of index and quantitative investment at China Universal Asset Management. During his presentation, Mr. Yang examined what he saw as the investment opportunities in the Mainland amid slowing economic growth, which he ascertained to be consumer staples and healthcare.
“Our view is that over the next three-to-five years, we think that growth will be very unbalanced across different sectors. Investment opportunities will also be uneven across sectors,” he predicted. “We see some opportunities in sectors such as consumer staples and healthcare. We do believe that even though there’s no major [economic] stimulus planned, we do see policies being put in place that will stimulate those sectors.”
These include, he said, the relaxation of the one-child policy and reform of the predominately government-owned hospital sector. Mr. Yang also pointed to the number of Chinese moving to cities and subsequent changes in lifestyle.
“We will see a lot of urbanisation, which will change many lifestyles of the 1.2 billion Chinese people. During this process, we see the desire for a better quality of life.”
Risk factors highlighted by Mr. Yang going forward in the Mainland market included the burgeoning and unregulated shadow banking industry, property bubbles in the country’s tier three and four cities, and local government financial vehicles.
The day’s first panel, entitled Challenges of Portfolio Construction in a Post QE World, saw an engaging discussion between five high profile asset management and wealth experts.
In answer to a question on the impact of the US Federal Reserve’s tapering of its fiscal stimulus, Douglas Yones, head of ETFs, Asia, at Vanguard Investments Hong Kong Limited, argued that the issue was largely irrelevant for institutions.
“For most of the clients and institutions we’re speaking to now, it’s rarely coming up. It seems like either the news has been out there enough that it’s priced in, or portfolios have adjusted enough that they’re less concerned,” he said. “We tend to talk more about what’s next. Are there crises we should be concerned with in certain markets, or are there opportunities we’re missing?”
There was also agreement among the panel’s members that ETF products had been an enabler for diversification when it came to asset allocation, allowing for exposure to specific markets and sectors.
“There’s a realisation that asset allocation is key for meeting long-term objectives. Definitely ETFs are the place to be to access some sectors or exposures on broad country and regional exposure, or within fixed income some of the specific segments – there’s daily trading, transparency,” noted Thomas Poullaouec, head of strategy and research for the investment solutions group, Asia-Pacific, at State Street Global Advisors Asia Limited.
Next up was the president and CEO of Yuanta Securities Investment Trust Company, Julian Liu, Tsung-Sheng whose talk focused on the development of RQFII ETFs in the context of Taiwan.
Mr. Liu cited recent popular protests towards a proposed trade treaty between the island and mainland China, and the impact this has had on cross-border financial services and Taiwan’s 100 billion RMB (US$16.02 billion) RQFII quota, which he said is now “massively delayed or even gone”.
Despite this setback, he told delegates that there was major potential for the RQFII scheme in Taiwan, given the increasing volume of deposits that were being converted from new Taiwan dollars to RMB. He said that if the RQFII quota was not approved soon, Taiwan would lose ground as an offshore RMB hub to other financial centres.
“We believe that if Taiwan does not get the 100 billion RMB quota, we’re losing ground to London, France and Singapore, while they’ve already received the quota from [the] Chinese administration,” he said.
Following a short break, the event resumed with a talk by John Davies, vice president, global exchange-traded products, S&P Dow Jones Indices, entitled Building Investable Indexes for the Asia-Pacific Market.
Mr. Davies guided the seminar’s delegates through some of the key developments in the history of equities indices, from 1896 and the creation of the Dow Jones Industrial Average, to the establishment of the S&P 500 in 1957, the Hang Seng Index in 1961, to the SPY unit investment trust in the 1990s, generally recognised as the first ETF.
“The man who created the SPY, his AUM ambitions for the first year for the first ETF was anywhere between US$1 million and US$5 million. SPY closed last night at US$158.5 billion. It’s the most actively traded single security in the market,” Mr. Davies pointed out.
During his speech he highlighted the rapid growth of ETF products, with 5,000 being on the market today with an AUM of just under US$2.5 trillion. He argued that the role ETFs had played in global stock markets could not be underestimated.
“In my opinion, the most innovative investment product in the last 20 years is the ETF. ETFs have democratised investing. It has allowed the people on the street to have access to investment and strategies that historically only large institutions were able to get access to,” Mr. Davies said.
Next on the agenda was second panel of the day, entitled ETF Options Strategies: Effective Strategies & Protecting Portfolios. The panel brought together four experts that included fund managers, market makers and stock market representatives.
In answer to the question: “What strategies are we currently seeing and how do we use them to maximise return?” from moderator Alan Lok, director, capital markets policy, Asia-Pacific, CFA Institute, the panelists shared their own experiences.
“We love using ETFs as an underlying for our options and structured products, because of their qualities: they’re diverse as an investment universe, the index they manage is tracked inside the ETF which saves us the hassle, and finally it’s easily tradable, because it’s listed,” said Antoine de Saint Vaulry, director, deputy head of equity derivatives trading Asia, Commerzbank AG. “We have protection products like puts and put combinations, leverage, such as calls and the like, and structured products such as accumulators. We also love using ETFs to build multi-asset strategies.”
The discussion then moved to some of the risk management and hedging considerations of using ETFs, and how product development in these areas can improve. “What I’ve discussed with some of my colleagues is how we need a short exposure ETF for the A50 or the CSI 300. It would be a guaranteed blockbuster,” said Matthew Wong, head of equity derivatives and chief operating officer of Hong Kong institutional business, KGI Asia Limited. “If you see in Asia the two ETFs that were in the lead in Hong Kong, one was the first synthetic ETF linked to the A50, and it got very popular because suddenly there was China fever, and investors wanted to rush into China. All the QFII applications were taking quite some time, and the quickest way was to get into the Hong Kong ETF market.”
The day’s third panel posed the question, Do ETFs & Indexing Work for Bond Exposures in Asia?. On hand to answer was a selection of big names from regional asset managers, exchanges and index companies.
David Quah, vice president, product development and marketing, cash trading, global markets division, HKEx, argued that bond-focussed ETF products were particularly attractive for retail investors in the region. “Looking at the development of bonds in general, there’s been a myth that Asian investors, particularly retail investors, are more interested in leveraged products such as derivative warrants than in bonds. Having said that, I’ve also noticed that compared to other regions, Asia is ageing, and ageing rapidly. For those of us who are ageing, bonds should definitely play a part in our individual portfolios,” he said, adding that ETFs were more cost effective than individual debt products when it came to gaining bond exposure. “I’m optimistic that the demand side for bonds ETFs will continue to grow in Asia,” Mr. Quah added.
The concept of leverage and inverse ETFs is perhaps one of the most exciting developments in the exchange-traded market, and this is was the focus of the seminar’s next presentation. Drew Blackburn, managing director and head of Asia, Direxion Asia Limited, told attendees how these products, while certainly not for everyone, have the potential to revolutionise an investment portfolio.
“The question we get quite a lot is “are leveraged and inverse ETFs right for me?” And to be honest the answer most often is “no”. Our view is that it’s a tactical product designed for sophisticated investors, whether that’s sophisticated individuals or institutions. For the vast majority of users it’s probably not necessarily an appropriate tactical product, because in order to use these product you need to understand the implications of using leverage, and they need to monitor their portfolio on a daily basis, because it will shift much more quickly,” Mr. Blackburn explained.
He then walked the audience through the basics of how these ETF products, covering areas including daily rebalancing, the implications of compounding and counterparty exposure management.
Mr. Blackburn then highlighted some prominent examples of how leveraged and inverse ETFs were being used by investors in Japan, South Korea and the US, before summing up with ten key takeaways on the advantages of using these products.
Insurers and ETFs
The penultimate presentation of the day was provided by Andy Yang, group head of investment and asset liability management at FWD Group Management Holdings Limited, which focused on the potential of ETF products for insurance companies.
Mr. Yang first revealed the extent of some of the analysis that insurance providers perform when it comes to allocating to asset classes, before talking delegates through an example of an efficient frontier analysis model.
He then echoed comments from speakers earlier in the day, when he highlighted how ETFs were ideal for those asset classes that require little active management.
“You might have the belief for a certain asset class that it is very hard to pick an out-performing active manager. There’s also the cost of search – you might look through 30, 50 or 100 managers to pick one, or maybe you don’t have the skill to pick a manager, or a very small allocation to that asset class,” Mr. Yang explained.
“Also, and this is very important to a life insurance company, if you buy an ETF it’s just one line in the accounts. If you had a global portfolio, with say 1,000 stocks in there – how many accountants would you have to hire to manage tonnes of dividends and custodians?” he added.
The final panel of the day examined the topic Using ETFs for Financial Planning and Wealth Management. Alan Ng, business development and investment management, Convoy Asset Management; Ben Zhang, managing director at Haitong International Asset Management Limited; Donna Chen, founder and managing director of Keystone Intelligence Inc; and Julie Kerr, director, asset management Ernst & Young Advisory Services Ltd, partook in some lively dialogue with the common conclusion being that this was one area where ETF usage was still to flourish.
With that, the seminar closed, with delegates leaving the event feeling educated and enlightened on the opportunities and challenges that currently exist in the ETF space.