Written for Public Mutual Berhad July 2008
Last year was an excellent one for the funds management industry in Hong Kong, which notched up several all-time records with gross sales hitting US$45.5 billion and net sales reaching U$6.9 billion – both a whopping 80 per cent plus up from the levels achieved one year ago in 2006.
In addition, total net asset value of all funds authorised by Hong Kong’s Securities and Futures Commission (SFC) breached the US$1 trillion mark for the first time, amounting to US$1,060 billion as at end-2007; while the number of SFC approved funds just crossed the 2,000 level at 2,040, also a first.
The industry in Hong Kong has come a long way since it started in the late 1960s and early 1970s when funds investment was brought into the then-British colony by British commercial banks that wanted to provide fund management services to pension funds and expatriates living in Hong Kong.
Later in the 1970s, US fund managers joined the industry and as mutual funds became more popular among retail investors by the end of that decade, the Hong Kong government formulated the Code on Unit Trusts, which provided the regulatory framework for retail funds. In 1989, the administration of this code was assigned to the newly-established SFC, which issued a more comprehensive Code on Unit Trusts and Mutual Funds (UT Code) a couple of years later.
Meanwhile, unit trusts were starting to enjoy fairly rapid growth in Hong Kong and by December 1987, there were 268 broad funds covering almost 500 sub funds under the management of 30 management groups. Of these, about 40 per cent were registered locally, with the rest domiciled overseas.
Over time the funds market in Hong Kong has proven to be a fairly resilient one. While the October 1987 global stock market crash had a significant impact on unit trusts in the territory, with some funds having to suspend redemptions and some unable to provide quotes; the later June 1989 Tiananmen Square massacre in Beijing, which shaved more than 580 points off the Hong Kong Hang Seng Index in a single day, seemed not to have affected the industry as much – no uncharacteristic redemptions were recorded during that time.
The growth of the unit trust industry in Hong Kong is strongly linked to the development of the city as a regional investment management centre. According to the Hong Kong Investment Funds Association (HKIFA), established in 1986 to represent the fund management industry in Hong Kong, the combined fund management business of the city grew by 36 per cent year-on-year, to reach HK$6,154 billion as at end-2006.
The Mandatory Provident Fund (MPF), set up by the Hong Kong government in December 2000 to help ensure some financial security for the working population during their retirement, also gave a boost to unit trusts, which was the medium that employees must choose in which to invest their savings under the MPF system.
Hong Kong’s fund industry continues to attract investment capital from non-Hong Kong investors, a sign of the city’s maturity as a regional financial centre. HKIFA’s latest figures show that in 2006, of the total HK$6,101 billion worth of non-REIT fund management business recorded, 62.1 per cent or HK$3,786 billion was sourced from non-Hong Kong investors. In fact, funds sourced from these investors have consistently accounted for more than 60 per cent of the fund management in Hong Kong,
Today, China plays a major role in Hong Kong’s funds sector and is expected to provide a sustained source of growth for the industry going forward. This is due largely to a memorandum of understanding signed between the China Banking Regulatory Commission and Hong Kong’s SFC in April 2007, which makes Hong Kong the only non-Mainland equity market in which Mainland commercial banks may invest on behalf of their clients.
Asian assets remained the favoured investment vehicle for fund managers in Hong Kong. According to the HKIFA, of the HK$2,315 billion worth of assets managed in Hong Kong at end-2006, 80 per cent was invested in Asia, an indication of the strong performance of the regional markets and the amount of regional expertise that is resident in Hong Kong.
Hong Kong gained its preeminence as a funds centre thanks its truly liberal and disciplined philosophy with regard to being an offshore centre. While there are no foreign exchange or capital control movements in place, there is a sound and flexible regulatory framework on unit trusts, and all the legal and financial ancillary facilities necessary to organise and manage funds are securely in place.
In addition to this, Hong Kong’s tax system favours income and capital gains from the ownership of securities – taxes are not imposed on dividends or the capital gains made on the disposal of securities, which is of significance to unit trusts that have their income or gains arising from within Hong Kong. Furthermore, no revenue related charges are imposed on the running of unit trusts in Hong Kong.
It was also the UT Code that has helped the industry expand. This code has been amended several times since its inception to accommodate new trends and market developments, such as guaranteed funds and futures and options funds. The current UT code is a result of a complete revamp in 1997 to allow for a new and more flexible structure for the authorisation of funds.
It clearly sets out the authorisation requirements making the process more transparent. In order to build a critical mass of funds, the SFC expanded its list of recognised jurisdictions, whose authorised retail funds may be recognised in Hong Kong under a simplified process. The SFC also recognises regimes where the supervision of investment managers is broadly equivalent to its own standards of supervision so that the managers from these countries could qualify as managers of retail funds that the SFC authorises.
This way, overseas funds with overseas managers are able to gain authorisation in Hong Kong, greatly increasing the universe of retail funds available in the city.
In the last two years, the SFC granted 130 new fund manager licenses and authorised 480 new fund products. According to HKIFA data, a total of 223 unit trusts and mutual funds, excluding REITS, were authorised in 2006, bringing the number of SFC-authorised funds to 1,973 by the end of that year, with a total net asset value of about HK$7,100 million, up 36.4 per cent year-on-year. Several of the new funds offered exposure to countries such as Brazil, Mainland China and India in line with global interest in emerging markets.
Currently, the SFC is conducting another comprehensive review of the UT Code with the aim of revamping and modernising it, so that it is up to date with market innovation and financial technology. The SFC wants to make it easier for funds and talents to congregate in Hong Kong, and if it has its way, Hong Kong will soon become the fund supermarket of Asia.