Hong Kong identified as a cross-border fund hub by asset managers

15 December 2016   Category: News, Asia, China, Global, Hong Kong, Europe   By Hui Ching-hoo

Global asset managers have ranked Hong Kong as a leading cross-border fund hub on the basis of its thriving Mutual Recognition of Funds (MRF) programme – according to a survey by New York-based financial services provider Brown Brothers Harriman (BBH).

The survey, which was conducted in October, included interviews with 52 global asset managers with AUMs ranging from under US$499 million to over $50 billion. The findings indicate that 50% of respondents expect Hong Kong’s local fund market to approach $1 trillion by 2025. In addition, 80% of respondents believe there is a medium-to-high probability that Hong Kong will be a leading Asian cross-border domicile by 2025.

The survey states that the launch of the MRF programme in 2015 was probably the most positive development in the Greater China fund market in the last few years. It was flagged by 63% of the respondents as either “critical or very important” to Hong Kong’s ambition of becoming a global fund hub.

Scott McLaren, head of the Hong Kong office at BBH, tells Asia Asset Management that the Southbound flow was admittedly “not very exciting” since the MRF’s inception in July 2015, especially compared to the amount of Northbound flow. “However, we believe the underwhelming response is primarily caused by temporary factors such as investors’ diminishing appetite [on A shares] and RMB depreciation. The situation will change dramatically when the A-share market is incorporated in the MSCI EM index.”

Despite the availably of multiple cross-border accesses such as the Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect and QDII (Qualified Domestic Institutional Investors), Mr. McLaren believes that the schemes are unlikely to affect the status of the MRF as the most prominent channel for Mainland outbound investment.

He says the MRF is exclusive, as Beijing is unlikely to replicate the scheme in other jurisdictions.  

The survey also states that UCITS currently dominate in terms of cross-border funds in Greater China. The report states: “Any discussion of the potential of Hong Kong as a fund domicile must consider the implications in the region. Despite a clear opinion that Hong Kong will become a leading cross-border fund domicile, the respondents remain bullish on the long-term prospect for UCITS.”

Fifty-eight percent of the respondents believe that the popularity of UCITS in the region will continue to grow over the next decade, while 63% opine that locally-domiciled products will supplement UCITS products in Asia. 

Mr. McLaren elaborates that the launch of the MRF will initiate re-domiciliation especially for Cayman-domiciled funds to register in Hong Kong, to take advantage of the distribution in Mainland China, but will have less of an impact amongst Europe-centric UCITS which will instead look to set up a new vehicle altogether in Hong Kong to capture the MRF opportunity.

He also cited figures from the Securities & Futures Commission (SFC) which show a drop in ranking for Cayman-domiciled funds in Hong Kong from second to fourth place over the last six years, despite the number of funds distributed in Hong Kong growing by sevenfold. “In Asia, UCITS is largely an institutional product, so it’s likely that groups are considering using local products for retail distribution strategies. This means that the choice between UCITS and local products is not binary, but instead are complementary strategies,” Mr. McLaren concludes.