The official launch of the Greater Bay Area (GBA) wealth channel on September 10 after more than a year of discussions, developments, consultations and then four months of radio silence is very good news, especially for retail banks and fund managers with operations in Hong Kong, as it potentially opens up a market of 70 million-plus people for mutual funds distribution.
The Wealth Management Connect (WMC) allows mutual funds domiciled in Hong Kong or China to be distributed by retail banks to their customers across the whole of the GBA. This means the target market of fund companies in Hong Kong has increased ten-fold.
Funds will be required to meet certain minimum criteria. Among other things, they have to be regulated, authorised and domiciled in either Hong Kong or China, rated as medium risk or lower by the distributing bank, and don’t use derivatives or leverage. So they can be considered relatively plain vanilla or non-complex.
There were more than 2,000 mutual funds authorised by the Hong Kong Securities and Futures Commission as of end-June 2021, including 850-900 that are domiciled in Hong Kong. But excluding those that would not qualify – such as exchange-traded funds, pension funds, high-risk funds and those which use various types of derivatives – leaves only around 100 that could be considered eligible for inclusion in the WMC scheme.
And if funds that only invest into A shares listed in Shanghai or Shenzhen are also excluded – on the assumption that Mainland investors are unlikely to buy mutual funds in Hong Kong that invest only in China – it’s likely that only 60-80 funds currently available can be used in the WMC.
Returns and products
One widely discussed issue is what kind of funds are likely to draw investors from China. A recent industry survey suggests they will be seeking far higher returns than typical Hong Kong investors expect. So it’s unlikely that bond and fixed income funds will be very popular, especially as standalone type products. China investors are interested in Hong Kong-invested funds, followed by Asian, and then other major securities markets.
The other much discussed issue is what products retail banks in Hong Kong are likely to want to distribute.
Wealth management in Hong Kong is highly developed. Many major banks not only offer personalised and tailored portfolios, but also provide some degree of active management to ensure the objectives agreed upon are maintained. So it does not sit well with the banks to have a very limited choice of mutual funds to work from.
Anecdotal evidence suggests many banks will likely expect several new mutual funds to be set up to cater to the needs of investors from China. The lenders are also looking to have these funds created as multi-asset or actively managed funds, with investments made either globally or within the Asian region. This enables a more balanced type of product to be offered, more closely matching the banks’ own criteria for giving their customers investment advice and guidance.
Not unexpectedly, global fund houses have been sitting back and waiting to see whether the WMC will actually go ahead. Given the low volumes in the Mutual Recognition of Funds passporting scheme between Hong Kong and China, they are unwilling to commit resources to set up new funds until the WMC commences and they can gauge opportunities for success.
What is clear is that UCITS funds from Ireland and Luxembourg, which dominate local distribution, are excluded from the WMC. However, it’s possible to get around this restriction by creating locally-domiciled feeder or fund of funds to invest into the UCITS funds, provided all the other criteria are met. These can be set up relatively quickly, and may be the best option with the Hong Kong government’s recent decision to subsidise establishment costs for Open-Ended Fund Companies in the city.
Progress may be “lumpy”
The biggest question of all is whether the WMC will be successful. There’s no doubt that there is a lot of support for the scheme from the governments and regulators in China and Hong Kong. There is clear evidence that China, and especially GBA, residents are keen to invest their savings beyond just Mainland-only securities.
As distributors, the banks are especially keen to further develop their wealth management offerings across borders, despite the slightly cumbersome account opening process. With a quota of 1 million RMB (US$155,463) per head and 150 billion RMB in aggregate in each direction, there is plenty of opportunity to build business.
In my view, we can expect slightly “lumpy” progress, with an initial high flow followed by a slowing down, and then an acceleration of sales after six to nine months. It will take time, but the WMC does have the potential to massively grow the domestic fund industry in Hong Kong.
*Stewart Aldcroft is an Asian fund management consultant with extensive experience in the industry, having worked for a number of companies including Schroders, HSBC, Franklin Templeton, Investec, and Citigroup.
