HGI Chief Executive Officer James Sun offers some unmitigated optimism over Hong Kong’s place in the fund-flow firmament
Hong Kong’s future is so bright, you’d better wear shades. That’s the message from James Sun, CEO of Harvest Global Investments, the local unit of one of China’s biggest and oldest fund management companies.
“The best opportunities are right here in Hong Kong,” says Sun, a former AmCham chairman whose untrammeled optimism over the city’s continued importance as the preeminent global financial hub for China comes as a ray of sunshine amid the all-too-often gloomy predictions of inevitable decline. “I've been here since 2004 and never thought about leaving. It's just wonderful.”
Sun says the reasons for his cheerful outlook abound, from the coming inclusion of Chinese shares in MSCI benchmark indexes, to the development of the so-called stock and bond connect programs, and Beijing’s recent decision to further open up its finance sector. The growing sophistication of Chinese investors seeking global diversification and more tools to enhance returns and mitigate risks mean there are drivers for both domestic and international flows through Hong Kong.
“It's China's gateway to the rest of the world and it's the world's gateway into China, and that will continue to be the primary function of Hong Kong,” Sun says. “Hong Kong as a gateway sits in a perfect position.”
Some might say Hong Kong has been hanging its hat on that worn-out old peg since China began its experiments with market reforms in the 1970s – if not as far back as the beginning of British colonial rule. But if the hat still fits, why not wear it: The skills, experience and toolkit built up over decades in the role as China’s gateway are sticky and won’t be easily surrendered; as a springboard into the rest of Asia, Hong Kong is still hard to beat; on top of that, there are the new engines of growth.
MSCI, the creator of global indexes used by fund managers to balance investment portfolios and gauge their performance, will next month include 222 domestic A shares in its Emerging Markets Index. A second wave of inclusions is due by August, with more to come as China continues its market reforms. That process will force institutional investors who have been under-allocating Chinese assets to reweight their portfolios.
Chinese equities now account for about 18 percent of global stock market capitalization, but only about 3 percent of global fund allocation. By 2030, around half of the US$8.5 trillion in net inflows to global investment funds are expected to have been allocated to Chinese companies, making the country the world’s second-largest asset management market after the US, according to a report last year by consultancy Casey Quirk that was cited by the Financial Times.
“If MSCI continue to allocate more into China, they have to follow,” says Sun. “And we are right here to help them.”
Recent indications by China’s leaders that they are committed to further opening of the nation’s markets and economy are also stoking the interest of overseas investors for more China exposure. The central bank on April 11 said foreign majority ownership of securities, fund management, futures and life insurance companies will be allowed "over the next few months."
That’s a move Sun said HGI welcomes, as it plays to the firm’s unique strengths as a local player with global characteristics – one that can meet the demand for deep knowledge of China and emerging Asia, together with international levels of compliance and execution.
“Only with international participation can the market and the industry continue to grow in terms of sophistication,” Sun said.
Unlike rival Chinese-owned asset managers in Hong Kong, HGI has an international mindset and global levels of compliance and execution hard-wired into its DNA, he said. Prior to joining HGI, Sun ran the Asian business of Charles Schwab, moving to Hong Kong from the brokerage’s New York base in 2004. Beijing-born Sun also had a stint at HSBC, helping to establish the group’s private banking business in China. (And let’s not forget that as a past chairman of AmCham, he led the 2012 and 2013 Washington Doorknocks, discussing key trade and policy issues with government and congressional officials.)
Parent Harvest Fund Management has three overseas subsidiaries, one based in London, another in the US and the Hong Kong unit that is celebrating its 10th anniversary later this month with a conference and gala dinner at the Shangri-La Hotel in Admiralty. Harvest’s Hong Kong arm itself began life as the Asia business of Deutsche Asset Management – which invested in Harvest in 2005 to create the largest Sino-foreign joint venture fund management company. The year after HGI was founded in Hong Kong, Deutsche’s China and Asian equities teams joined the group.
In those early days, the Hong Kong unit’s client base comprised mostly overseas investors. “We actually managed very little Chinese money,” Sun said.
As China has gradually opened up, more money has come to Hong Kong looking for global diversification, he said. “Our expertise fit right in, because we are a Chinese firm but we have international caliber teams and investment processes. And they actually come to us and say, look, how do we invest beyond China.”
That process began more than 10 years ago, through Hong Kong-listed stocks and later via Asian emerging markets and global allocations. More recently, the stock connect initiatives linking Shanghai and Shenzhen markets with Hong Kong allow investors on both sides to trade shares across the border, while the bond connect program does the same for fixed-income products. An ETF connect is expected in the second half of this year.
In late April, China indicated it would further open the door for foreign fund managers to invest domestic investors’ assets overseas. China doubled quotas for the Qualified Domestic Limited Partnership trial programs in Shanghai and Qualified Domestic Investment Enterprise trial programs in Shenzhen, allowing fund companies to invest a total of US$10 billion in assets overseas, Bloomberg News reported.
This shows China is continuing to open up as the country’s investors – like their global counterparts – seek more sophisticated investment options. HGI’s assets under management are now split about evenly between overseas and domestic money, Sun said. Mainland Chinese institutional investors are expected to increase their allocations to non-Chinese asset to around 17 percent by 2030, the Casey Quirk report said.
Adding to the two-way flow through Hong Kong’s gateway now comes a third wave: that created by China’s outbound investment initiatives such as the Belt & Road.
“Because the driving forces are from China and the interactions will happen in Asia, basically you are creating a new frontier of development,” Sun said, adding that because of HGI’s experience in the region and capabilities, this will “create investment opportunities that we can see that others cannot.
“And that's also Hong Kong’s expertise,” he said. “Hong Kong has always been a city that knows how to get on the next rung of opportunity.”
Global local, local global
Being able to swim in both international and Chinese investment oceans gives an edge, says Chief Business Development Officer Ashley Dale
As HGI rides the market reforms and economic opening that is transforming China, the firm is undergoing a fundamental shift in its own business too, said Ashley Dale, who joined HGI as Chief Business Development Officer to transition the firm from one in which Deutsche Asset Management still ran the sales and distribution of products for the global market to one where the Hong Kong arm of HGI controls that side of the business.
“You can categorize us as a highly sophisticated asset manager that really knows its onions in China,” said Dale, a former British Army officer who adds a UK twist to the senior executive team in Hong Kong, “but also elsewhere throughout Asia, and is now taking what was previously a white label brand through a western company and saying, ‘Right, we can do this ourselves because we are good enough and because we can actually make a difference in the products and offerings.’”
Having grown out of Deutsche Asset Management’s Asia arm, HGI has long had depth and expertise in Asian equities and fixed income, adding the parent’s domestic China knowhow, first through the 2005 joint venture, and later embedding that into the Hong Kong unit’s makeup four years later. Now, HGI develops products to sell to the rest of the world, whether that’s funds and other solutions aimed at US consumers and global institutions, or to the increasingly sophisticated domestic Chinese market.
“In time, we want to be seen an international player with Chinese roots, rather than a Chinese player trying to go global,” Dale said.
While globalization of asset markets and the growing investment appetite of emerging market asset owners and individuals is one of the key drivers transforming the investment-management industry worldwide, one of the most important – and differentiating – forces reshaping HGI’s business has been the structural changes in China’s economy.
China’s market has been more or less a beta market – driven by allocations based on market capitalization that seek to mimic the performance of the overall indices. Large state-owned enterprises and finance companies tended to dominate. Over the past five years, that has begun to change, creating more opportunities to seek alpha – those rates of return in excess of the market norm – from sectors such as domestic consumption, education, pharmaceuticals and technology.
“In the past, it's been about offshore China. Now the trend is for more onshore China, and as a Chinese manager with the local knowledge we can offer those kind of products much better than the other houses,” Chief Investment Officer Thomas Kwan said.
To do so requires a research-focused approach that is agnostic about the nature of the securities in a portfolio. The team simply seeks out the very best companies in China. And if that may sound obvious, Kwan points out that most funds are either based on domestic-only A shares – which remain heavily restricted by quotas for international investors – or a mix of Hong Kong-listed H shares and American Depositary Receipts – securities that have other shares as their underlying assets.
“Today, if you want to invest in China, why would you choose one of the big, established international firms?” said Kwan. “If you look at the global houses, they may have 10, 20 analysts in Hong Kong looking at China, but we have 280 investment staff.
“We have local knowledge. Not only that, we are global,” he said. “That's very important, because each market has its own conventions or culture that may not fit clients from other markets.”
And it’s not only an international mindset and deep understanding of Chinese markets that’s required: being able to design products that are not hobbled by geographical or asset class restraints matters too, said Dale. “Because we have got all the pipes open, we are totally agnostic. We are just finding the best companies at the best valuations,” he said. “And that's surely how the market is going to move over the next 10 years as China opens up.”
That means incorporating the impact of China’s economic engagement with countries along the Belt & Road, for example.
“So we’re actually looking at where the government is going. We have such insights in China but also, through the Asia investment team here, can recognize where the wider opportunities are,” said Dale.
“What we are doing is taking where we see China is today, where China wants to be, and how the rest of the world is going to accept China, and packaging that into products.”
From better to best
Demands for more transparency, better governance are only good news for HGI, says Chief Investment Officer Thomas Kwan
Buying into China’s growth story has never been easier, as the pool of available securities expands exponentially. On the other hand, growing demands from governments, regulators and asset owners for sustainable and responsible investment ratchets up the risks for shareholders. Resolving these contradictions poses a question that HGI Chief Investment Officer Thomas Kwan sees as a golden opportunity.
“How can we more systematically analyze a company? That's the key,” Kwan said. “When you have 3,000 or so companies in the universe, how you more effectively analyze the returns as well as the risks in this market becomes very important.”
Technology will provide part of the solution, with longstanding computer-based modeling augmented by newer technologies such as big data analytics, machine learning and artificial intelligence. With China a global contender in many of these new fields, Kwan said HGI may have an advantage over its rivals in designing robust selection, monitoring and reporting systems.
Two other pieces that need to fit together to solve the puzzle are a deep and experienced bench of investment professionals, and an ability to tailor products that meet the increasingly stringent ESG – environment, social and governance – criteria.
Kwan will lead a sizeable ESG team that he is now building at Harvest to put in place those systems to meet the group’s commitments as a new signatory to the Principles for Responsible Investing, a United Nations-supported initiative for the finance industry (See ‘Force for change’). HGI isn’t content to be just one of the first movers in terms of ESG in Asia, but wants to be the regional leader, Kwan said.
“We really believe in China’s new focus on quality of growth,” he said. “As a fund manager, we should take an active role in this strategy, because responsible investors are very important in driving responsible behavior of companies. That will lead to sustainable growth in China.”
Backing the Chinese government’s push to wean the economy away from investment-driven, highly polluting industries and toward creating an “ecological civilization” isn’t just the ethical thing to do. It’s also a way to showcase HGI’s core strengths of being able to pick out the best of Chinese investments based on deep local understanding, as well as spotting the positive impact of the nation’s outbound investments, and to wrap these in products that meet the evolving global standards for compliance, reporting and verification.
“The opportunity in China right now is no longer about the beta. It’s the same as with the economy. The growth rate is not so important; the details are more important,” Kwan said.
China’s challenges are also not unique, but are shared by many emerging markets – including many that form the Belt & Road Initiative. And while environmental and social issues were of crucial importance to sustainable investment, effective measures to improve governance would naturally feed through into better overall performance, he said.
“Governance is a key concern for investors in emerging market countries, including China. But it’s not just about choosing companies with good governance standards,” he said. “We are trying to use our power as one of the largest fund managers in China to actually give incentives to companies to improve their E, S and G.”