Fund managers in Asia will see increasing competition from index vehicles, say proponents of indices and index investing. Garrett Bouton, chief executive for the global individual investor business at Barclays Global Investors Services (BGI) in San Francisco, believes a number of exchange-traded funds (ETFs) will be introduced to Asia over the next year following the phenomenal success of the Hong Kong Tracker Fund. Mark Shipman, a lawyer at Clifford Chance, which worked on the Tracker deal, says, “When I hear about ETFs, I’m glad I’m not in the mutual fund business.”
Vincent Duhamel, principal and CEO at State Street Global Advisors Asia (SSGAA) in Hong Kong – the manager of the Tracker Fund – explains ETFs are traded on an exchange like a stock, but avoid large transaction costs by sticking to an open-ended structure where contributions and redemptions are executed by brokers on an in-kind basis. Instead of a mutual fund, in which an investor exchanges cash for units in the fund, a broker buys units of an ETF by collecting an exact match of the underlying securities and exchanging these for units in the ETF.
Bouton says there are three ways to introduce more ETFs to Asian investors. First, cross-trading of ETFs from outside Asia. He notes Hong Kong is now in a pilot program with Nasdaq to let local investors trade seven Nasdaq stocks in Hong Kong time. This deal also includes the American Stock Exchange, which is host to all the ETFs in the US.
“Why not trade iShare funds?," Bouton asks (iShares are BGI-managed ETFs). All this would require is for brokers in Hong Kong to create and redeem shares in ETFs by having a correspondent relationship with authorized brokers in the US. “This would create the first truly global equity market,” he says.
Another tactic is cross-listing of ETFs from outside Asia, which would require governmental approvals. The Singapore Stock Exchange and the American Stock Exchange announced a joint venture in June that will bring US ETFs to Singapore. Bouton expects, however, this agreement will take many months to work out, as it is beset by a long list of regulatory and technical hurdles.
Asian markets
Last, ETFs are being considered in a number of Asian markets, working off local indices. BGI, SSGA and others are preparing to introduce ETFs in Japan, perhaps as soon as the first quarter of 2001. BGI will use a new Standard & Poor’s index, TOPIX 150, and list a product on the Tokyo Stock Exchange, while SSGA says it is in advanced negotiations with various partners, possibly using an outside index to start.
Singapore, Hong Kong, Taiwan, Australia and even Thailand are other possible venues for local ETF products. South Korea is conspicuously not on ETF providers’ agendas, however. Duhamel explains the stock trading culture there is so short-term oriented – and ETFs are designed for the buy-and-hold investor – that it will take a long time to market ETFs.
Asia presents a number of obstacles, however. Aside from the Tracker Fund, which is only a year old, there is no tradition of index investing. Bouton says BGI will get around this by showcasing ETFs as a way to buy into a market or a sector, rather than as an index product. In some markets such as Japan, there is a relatively low level of retail stock investment. And in all countries, major changes to legal frameworks and tax structures are required.
Duhamel believes, however, the inherently attractive nature of ETFs will overcome these obstacles. He says although active managers typically can outperform an index in emerging markets, they charge high fees – up to 5% – for their services. ETF fees are lower; for example, in the US, fees on ETFs based on international MSCI country indices are less than 1%.
Clifford Chance’s Shipman says the regulatory structures for ETFs in Hong Kong and Singapore are already in place, and only require a licence from the regulator. “The regulatory framework is there, so let’s do ’em.”
