Foreign firms planning on a Hong Kong-domiciled product for the Mutual Recognition of Funds initiative will likely find limited appeal in China, said Anthony Yeung, managing partner and chief executive of Quantum China Asset Management.
As Yeung sees it, China-based HNWI and institutional investors already have channels to invest in offshore funds.
Therefore, the main opportunity with the MRF scheme going north is for a Hong Kong-domiciled fund to tap the Chinese retail investor base. But that comes with challenges.
“Finding China-based retail investors for offshore funds will be difficult. You need a lot of education and marketing and resources before it can take place. Chinese retail investors are not very sophisticated and prefer to invest in stocks themselves rather than in funds.”
Tax issues for Hong Kong-domiciled funds also complicate the MRF.
About 90% of funds in Hong Kong are domiciled in the Cayman Islands because tax and regulatory issues are more favourable, said Yeung, who was previously managing director for Greater China at JP Morgan Chase Bank before launching his own firm in 2014.
With a Hong Kong-domiciled ETF, for example, the tax is 16.5% of net profit. “The remaining portion to the investor will be quite minimal even if you have a 30% return.
“The concern with A-share funds listed in Hong Kong is that they haven’t included any tax calculations in their valuations. If funds want to domicile in Hong Kong and invest in China, they need to think about Hong Kong profits tax and securities tax in China.”
Yeung is also staying away from Stock Connect investing, but said he will review it again in six months.
“We’ll wait until the market is more calm and consolidated and those low level retail investors are out. Otherwise the market is not logical and there’s a lot of stress investing in A-shares.”
PE style
Quantum’s funds invest in companies listed in Hong Kong and operating in the healthcare, environmental, internet-related and real estate sectors.
The firm also looks at Hong Kong-listed shell companies that want to convert to profit-making businesses. Yeung believes his firm is more hands-on than most asset managers.
“We have a private equity style but only invest in liquid assets. We tend to get involved with management to change the company by taking a controlling stake and directly influencing the direction of a company.”
The involvement requires more people to manage the underlying investments. Quantum has 20 on the investment team.
Yeung himself also serves as executive director of some investee companies such as South East Group and Leyou Technologies.
Investors in Quantum funds are only HNWI and institutional, and the funds have attracted investors strictly through client referral, he said. However, he is looking into private bank distribution. Targeting the retail investor base requires time, people and money.
“We would need 3-4x our current staffing and finding good talent is difficult.”
Taiping tie-up
Previously, Quantum ran co-branded funds with mainland insurance firm Taiping, which is owned by China’s Ministry of Finance.
Yeung said during his time as an investment banker, he built a relationship with the Ministry.
When he decided to launch his own fund, they helped by asking Taiping to co-brand the funds and provide Quantum with compliance, settlement and general backend support.
Yeung said the assistance enabled him to launch his first fund in three months instead of nine.
Taiping shared part of the management fees, but did not share in returns, and had no decision on how he allocated investments, he said.
The first three funds are co-branded Taiping Quantum, but the co-brand was dropped starting with the two most recent funds, and backend support is now done inhouse, Yeung said.
