MRF: more of a pop than a blast

Added 16th June 2016

Six months into the MRF scheme, one lesson is that northbound funds should focus tightly on distribution strategy to gather assets, industry players said.

MRF: more of a pop than a blast

Since January, four out of six approved Hong Kong funds (northbound) have started to sell under the Mutual Recognition of Funds scheme. Among the northbound products, the JP Morgan Asian Total Return Bond Fund so far captured about 90% of the cumulative sales.

Overall MRF northbound fund sales, which hit RMB 1.36bn ($207m) for the first four months this year, were also significantly higher than the southbound flows.

“JP Morgan’s strong distribution plan is very well received in the mainland, and that’s really been the core of its success so far,” said Jasmine Baker, analyst at Z-Ben Advisors in a meeting organized by fund distirbution services firm Calastone.

Issues surrounding MRF sales have been on the distribution side, she said. For instance, some salespeople initially mixed up the MRF scheme with QDII scheme, another program which allows mainlanders to invest in overseas products.

“You need to have a very strong distribution plan in place before you move. As you move, you have to make sure the distributors are doing, on the ground, what you had planned,” she said.

"Z-Ben estimates that northbound MRF sales will reach $140bn by 2021, and southbound $100bn"

Big brand name products sold through the MRF are more likely to be accepted by both regulators and mainland investors, she added.

However, the small-scale Hong Kong-based Zeal Asset Management differentiated its product by first partnering with popular online platforms and gradually expanding to other brick-and-mortar distributors.

Still, many northbound funds are still waiting for approval from the China Securities Regulatory Commission. They include an Asian bond fund from BEA Union Investments, which filed an application in July 2015.

BEA Union Investments CEO Eleanor Wan said she is “a bit disappointed by the timing,” as she originally expected the product to be launched last year.

However, Wan said she's learned to be patient with the fund approval process after past experience with the Monetary Authority of Singapore,

“MAS didn’t answer our questions at all. You never know what your funds’ status is. It’s the same story [with China's regulators]."

Seeking volume

Wan expects that in five years’ time, the MRF will gradually expand the product range, although the scale is unlikely to match the UCITs program in Europe.

However, Stewart Aldcroft, managing director and APAC senior advisor at Citi’s markets and securities services, observed that despite the big interest in the MRF by foreign asset managers, they have been reluctant to put in resources.

“Everyone wants to have a bit of China. But they are not prepared to invest $5 milllion-plus to get started without seeing [stronger capital flows].

“Until we start to see some of the volume pick up enormously, I don’t see that many asset management firms are encouraged at this point,” he said.

Looking at the long-term potential, Z-Ben Advisors believes the MRF could become the third pillar in the global fund industry after the UCITs regime in Eruope and the US 40 Act regime in the US.

The firm estimates that northbound MRF sales will reach $140bn by 2021, and southbound $100bn.

Hong Kong asset managers have been anticipating a relaxation of the MRF rules, while some firms are also considering opening wholly-foreign owned enterprise (WFOE) to source onshore investors, according to Z-Ben.

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