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Haitong International Asset Management, the Hong Kong subsidiary of Chinese financial conglomerate Haitong Securities Group, is expanding its exchange-traded fund business overseas with the introduction of its first ETF in Europe.
Haitong International teamed up with the UK’s Tabula Investment Management to list the Asia high-yield bond ETF in London in September. The fund aims to capitalise on portfolio rebalancing by European institutional investors, according to James Su, Haitong International’s head of fixed income investment.
The Tabula Haitong Asia ex-Japan High Yield Corporate Bond ESG ETF tracks a portfolio comprising Asia ex-Japan high-yield bond issuers with high environmental, social and governance ratings.
“European investors increasingly favour Asia high-yield because of their low default rate and better yield compared to other fixed income assets such as US corporate bonds, Latin America and emerging-market bonds,” Su says in an interview with Asia Asset Management. “For example, liability-driven investors such as life insurers have strong demand for high-yield bonds as they’re eager to look for yields for asset-liability matching under the low interest rate environment.”
Asian bonds, including high-yield debt, have been one of the fastest growing asset classes in the global fixed income universe. According to figures from JPMorgan Chase & Co, the Asia Pacific debt market capitalisation surged almost 430% to US$1.2 trillion over the last ten years.
Su says the size and liquidity of the Asian high-yield market is attractive for international investors, especially those who want to capture economic recovery from the coronavirus pandemic.
“We believe our new ETF can help investors capture the strong returns in the Asia high-yield market, and to better control their risk exposure,” he says.
But the heavy weighting of China’s property sector in the ETF’s underlying benchmark could be a deterrent for investors. The sector has been hard hit this year as Beijing clamps down on leveraging by property developers.
Chinese property developers represent up to 45% of the benchmark, the iBoxx MSCI ESG USD Asia ex-Japan High Yield Capped Index.
However, Su plays down the impact on investor interest in the ETF. “The average default rate of the ETF’s underlying bonds remains low at less than 3%,” he says. “Also, the average return for Asian high-yield is around 10% per year. Many yield-seeking institutional investors still find the ETF very attractive.”
Moreover, he points out that debt-ridden property developer Evergrande Group, the world’s most indebted company with more than US$300 billion in liabilities, was dropped from the underlying benchmark when it was rebalanced in September at a time when Evergrande accounted for 1.8% of the index.
Frederick Chu, executive director of ETF business at Haitong International, who joined Su at the interview, argues that although Chinese property bonds are exposed to high default and event risks, Beijing is working to improve property market fundamentals, including restricting developers from undercutting prices to boost sales.
“We believe individual names won’t deter investors from investing in Asian bonds,” he says. “Our ETF allows investors to gain access to a portfolio of Asian high-yield credits, which is less risky.”
Su believes the ETF can cater to strategic allocation demands of European investors. Although ESG is now a prerequisite for most European investors, there’s a dearth of high-yield bond ETFs focused on ESG. Figures from the German stock exchange show that assets under management for sustainability focused ETFs listed on the Frankfurt-based electronic trading platform Xetra soared 218% year-on-year to 137 billion euros ($161.62 billion) as of June 2021.
Meanwhile, Chu says Haitong International will focus on developing broad-based ESG funds as part of its overall ETF strategy.
“Unlike many local rivals, our clients are mainly institutional investors,” he says. “We hope that our broad-based ETFs can provide building blocks to investors for their tactical asset allocation and help them gain exposure to fast-growing ESG companies in China.”
He adds that the company will continue to leverage resources across the Haitong Group and seek partnership opportunities with foreign institutions to sell its products to local and overseas clients.
Haitong International had HK$63.3 billion ($8.11 billion) of total assets under management as of March 2021.
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