With plain vanilla getting crowded, Hong Kong’s small ETF providers look to smart beta

by , 28th December 2017

Hong Kong’s plain vanilla ETF market is crowding, like elsewhere in the world. This means that smaller and newer issuers have to look elsewhere for opportunity, Felix Xu writes.

Smart-beta and thematic ETFs appear to have a better chance to stand out from the crowded plain vanilla ETF market in Hong Kong. But only if they can track up-and-coming sectors and industries, the experience of Premia Partners suggests.

The Hong Kong-based asset manager – founded by veteran asset managers, including former BlackRock director Rebecca Chua, and former iShares head of APAC fixed income Aleksey Mironenko in September 2016 – have gained significant AUM from its first two ETFs. They are the Premia CSI Caixin China Bedrock Economy ETF and the Premia CSI Caixin China New Economy ETF.

They are the first multi-factor ETFs in Hong Kong tracking new Chinese sector and are designed to track the sectors like healthcare, tech, telecoms, and IT, all of which are identified by Chinese Premier Li Keqiang as the focus under the country’s 13th five year plan.

According to Laura Lui, a partner and co-chief investment officer of Premia Partners, the ETFs have drawn “overwhelming” inflows since their inception on October 24, raising about US$50 million each thus far.

From the strategic perspective, Premia Partners positions itself away from leading ETF players to put its emphasis on alternative ETF products.

The company will focus primarily on smart-beta and thematic ETFs, and has two-to-three funds in the pipeline, says Ms Lui.

“They are all thematic and some are Asian-focused. The ETFs are scheduled to be launched in the second quarter of 2018,” she says.

Ms Lui hails the positive market responses for its first two ETFs, noting that they are “among the top three best performing ETF listings in the city over the past two years in terms of the size of fundraising.”

There are only a few Mainland sector ETFs available in Hong Kong such as the China Universal CSI Health Care Index ETF, but the industries tracked by these ETFs are too narrow to meet the growing institutional investment demand on new economy sectors.

In the absence of related ETF products in the market, institutional investors can only purchase individual stocks such as Tencent, Ms Lui points out.

She adds her company’s smart beta ETFs fill the void and provide a “comprehensive tool” for portfolio allocation.

Currently, the majority of ETFs on the Hong Kong Stock Exchange are broad-based ETFs such as the Hang Seng H-Share Index ETF and the CSOP FTSE A50 ETF.

Although Hong Kong’s ETF market has long been dominated by plain vanilla products, smart beta ETFs will be able to gain market share because more institutional investors are looking to invest in ETFs that are not broad-based for portfolio allocation, Ms Lui says.

Asian institutional investors prefer to invest in US ETFs because of their in-house requirements on ETF liquidity and asset size, but they have gradually loosened the restriction to include smart-beta strategies in their portfolios, she adds.

According to fund advisory firm Morningstar, the AUM of smart beta ETFs in Asia Pacific grew 67.1% between June 2016 and June 2017 to reach US$16.9 billion.

Ms Lui says customised indexation is key for Premia Partners to stand out. To this end, the company has tapped Jason Hsu, founder and chairman of quant investment advisory firm Rayliant Global Advisors, who has come on board as a senior advisor.

Dr Hsu brought in Caixin Rayliant Smart Beta (CRSB), a joint venture between Mainland financial news group Caixin and Rayliant Global Advisors, as index mythology provider for Premia Partners’ first ETFs.

According to Ms Lui, the underlying index for the ETFs provided by CRSB is considered the “enhanced CSI 300 Index” to track China’s new economy sectors. The CSI 300 Index is China’s benchmark stock index.

Dr Hsu is at the forefront of factor investing, which seeks to identify historically persistent drivers of return factors in order to produce better risk-adjusted returns versus traditional market cap weighted indexes, Ms Lui says.

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