Having spent the last three years as an executive director of Guotai Asset Management, Gerard de Benedetto left the firm early in 2011 to develop an entirely new Chinese fund venture for the Italian asset manager Azimut. What was the thinking behind this idea and what benefits does it offer to offshore investors?
De Benedetto says of Anzhong, “For us, the main opportunity was to develop Offshore RMB as an asset class in itself. Azimut, our parent company, had clients doing trade finance business in China who had continually to change funds in and out of foreign currencies. We wanted to cater to those clients who might not necessarily be looking for risk products, but more a place to park their RMB. They get the advantage of having an RMB appreciation play and any incremental yield is seen as a bonus.”
It took several months to the get the new product approved. De Benedetto explains: “We spent a long time with the regulator in Luxembourg, mainly trying to explain to them exactly what Offshore RMB is. By the time we received approval, it was the end of July, which is not exactly a great time to launch a fund. We put it in front of several large European investors with a €250,000 buy in and I’m pleased to say we managed to get some money in before the summer break. To date, our clients are concentrated in Europe as we haven’t done any marketing elsewhere, and we have another roadshow in Europe coming in September.”
So what is the next step for Offshore RMB development? How will Beijing balance concerns over forex reserves and onshore liquidity with developing offshore markets?
G de B: Offshore RMB is a very large trend. It may be an old saying, but in this case the “trend is your friend.” I think we’ll see a pronounced opening of offshore bond and repatriation channels, and expansion will continue, most likely at an even faster rate. Chinese companies get much cheaper financing offshore so demand to issue in Hong Kong will likely continue.
“The risk that we see is a growing need for credit analytics. Currently, only high-quality companies are issuing Dim Sum bonds, but in the future we could see second and third tier companies issuing. For these we need better credit analysis. Another issue that needs to be resolved is if an entity issues in Hong Kong but only has onshore assets, what happens if the bond goes bad?
“A lot of people have been talking about the channel back into China, be it “mini-QFII” or “RQFII.” But currently the actually channel is quite narrow, so I think we’ll see more and more products evolving in Hong Kong for overseas investors. But the major trends for Offshore RMB bonds will be more and more names with a variety of credit qualities and longer durations.”
IPA: You have stated in the past that you would focus on Fixed Income. Could you explain why this is and specific FI opportunities you see.
G de B: “We think the FI space is well-sized. In China, if you look at pure FI, domestic asset managers only have about RMB 250 billion in FI mutual funds. That’s versus a bank deposit market literally100 times larger. So we see massive potential for FI innovation and development.
“China’s FI sector is still developing, and there is a complex regulatory environment to navigate. Most asset managers have to invest in exchange-traded products and the interbank market is not suitable for them. This is one of the reasons for low FI exposure in China. But now the government has given the green light to further develop the market as it seeks to reduce bank lending as a percentage of total financing.
“Moreover, there is huge competition in equity products. We are working on an equity product but our target clients - institutions and HNW individuals, are pushing for yield products.”
IPA: Research shows money is leaving the mutual fund industry in China. What is your take on this? What is driving the shift and where is it going?
G de B: “We calculated that organic flows in the first half of 2011 resulted in a net reduction of RMB 46 billion AUM for China’s MF industry. RMB 189 billion entered via new product launches while RMB 235 billion exited. The big question is why? We feel there are enough products on the market, and the problem lies elsewhere.
“Part of the explanation is the tendency of Chinese investors to go in and out of equities chasing short-term returns. Another problem is that most Chinese mutual funds perform poorly on a risk-adjusted basis. After fees, the value is hard to see. We’ve seen a surge in passive
investment across the globe - and China is now part of this. Of course there is room for active management but it must be within an overall asset allocation context. Sophisticated Chinese investors are becoming more experienced with risk and they are looking for solutions not products.”
IPA: You’ve mentioned a desire to improve investor awareness of risk and portfolio management techniques. Please could you tell us a bit more about our favoured techniques and their advantages?
G de B: “We like to give a simple example to explain volatility. Imagine you had two portfolios. Portfolio A returns -5%, +6% and +5% in the first three months. Portfolio B returns -10%, +6% and +10% over the same period. Which is better?
“The answer is Portfolio A. They both have an average annual return of 2% but Portfolio A has a better compounded return, as well as lower volatility. So basically, we advise clients to seek the highest return for the lowest risk, and show them that asset allocation is the single biggest contributor to returns.
“A more practical example is that if you had invested solely in the CSI300 for the past five years or 50% in the index and 50% in bonds, the latter would have given you better returns with much lower volatility. Annual returns of 6, 7 or even 8% with little risk are not difficult to find. And the harsh truth is, customers are becoming sophisticated more quickly than service providers.
IPA: You mentioned an equity product you are working on. Do you have anything else in the pipeline and how are these shaping up?
G de B: “We’re keen offer more asset allocation options. Along with the Offshore RMB fund, we’re developing an onshore FI and an onshore equities product. The FI product will look very much like the Offshore fund but for local clients. For the equities product, we’re hoping to launch this with a partner within two months.