China factor adds to territory’s charm

For Hugh Simon, chief executive of Hamon Investment Group, Hong Kong “simply works” as a fund management centre. The former Lazard banker says many of the small details that ensure the competitiveness of one of Asia’s biggest international financial centres often go under-appreciated.

Mr Simon cites Hong Kong’s efficient airport, its good schools and the ease of hiring domestic helpers as examples of such factors. Others include the city’s multiculturalism and its appeal to fund managers of different nationalities.

“I can employ an Indian fund manager and attract him to Hong Kong. He can sit next to a mainland [Chinese] and a Taiwanese fund managers and they can share their views. If [such arrangements] didn’t work, Hong Kong wouldn’t work,” Mr Simon says.

Whether such factors go under-appreciated or not, they have helped fuel a spectacular growth in Hong Kong’s funds business in recent years.

The value of funds and assets managed through Hong Kong grew by more than half last year and is already more than twice as big as it was in 2005, according to the Securities and Futures Commission, the market regulator.

By the end of last year, Hong Kong logged HK$9,600bn (£621bn, €788bn, US$1,230bn) of fund management business, compared to just HK$2,900bn in 2003.

A large part of that growth is thanks to the economic liberalisation of mainland China. While Hong Kong has long been a springboard for foreign investments into China, recently it has also become the gateway for Chinese investors to access the international market.

Over the past few years Hong Kong has already become a favoured destination for Chinese fund outflows through the Qualified Domestic Institutional Investor funds. More recently, Chinese sovereign wealth funds have also been investing in the Hong Kong
market.

Benjamin Lee, managing partner of Phoenix Property Investors and a former investment banker, says Hong Kong’s edge over its regional competitors, such as Singapore, is its access and proximity to China, which Mr Lee calls “the most important investment banking market in the world”.

The China factor has attracted large investment banks, and fund houses, to establish a presence in Hong Kong. This migration has accelerated in the past year, with Goldman Sachs, Credit Suisse, Deutsche Bank and Morgan Stanley all having moved, or announced plans to move, important personnel to their operations in Asia.

“This has a major effect on the fund market,” says Mr Lee.

The raft of relocations is a sign of the growing importance of Asia’s markets for international investors since the credit turmoil began last year in the US and Europe. “Because many investors are now chasing growth and many are taking a new look in emerging markets, Hong Kong has benefited. Other people’s misfortune is now Hong Kong’s fortune,” says Mr Lee.

Mr Simon says the amount of capital and the expertise now residing in Hong Kong has reached a critical mass such that other segments of the fund market are also being drawn to the city. “Hedge funds came because of the investment opportunities [but now] the fund of funds are here to research the managers, and to collect money [from Asian investors, such as pension funds],” he says.

This shift, coupled with the upheaval in western investors’ ‘home markets’, has spurred a change in perspective towards investing in emerging markets, which also benefits Hong Kong, Mr Lee says. He recalls attending institutional investor conferences in the US in previous years, where “investors just assumed investing in emerging markets was inherently risky, and the question was: ‘How do we handle it?’”

By contrast, at this year’s conference, participants for the first time broached the question of “what are the differences between investing in the emerging markets versus investing in the US? Which is riskier?” Mr Lee says.

But while there are such silver linings, Hong Kong’s fund market has not escaped entirely unscathed from the credit crunch. Hong Kong’s stock market, like many other Asian markets, suffered greater falls than markets in Europe and the US, in part because it had risen more sharply in the first half of last year. This has affected sentiment and “some money has been taken out,” says Mr Simon, but he adds that “there is still money here for the growth”.

Terry Pan, head of retail business at Jardine Fleming Asset Management, says this year “has been quite a challenge – to the extent that the market has been very choppy, and some investors have taken bets off the table”. The situation, however, was still far better than the “dark days of the late 1990s”, during the Asian financial crisis.

Local retail investors, in particular, have remained active, despite the fact that many will have lost money on their investments, Mr Pan says. “Common sense will tell you that when people get burned, they shy away from the fire for a while. But, instead, when some investors lose 20 per cent of their investment, they say, give me a product that will make that money back,” he says.

As a result of this enthusiasm, “there are a lot of new players and new products” in Hong Kong’s fund market. A growing number of funds and banks are looking to tap into the adventurous nature of Hong Kong’s retail
investors.

“In Hong Kong you see 60- or 70-year-olds buying New Zealand dollars, sometimes even on margin [financing]. Do they fully understand the risk involved? Probably not,” says Mr Pan.

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