BlackRock Inc.'s new license to invest directly in China's capital markets could prove a key to fending off increasingly fierce competition for the A-share exchange-traded fund business the giant New York money manager pioneered a decade ago.
The firm's $7 billion iShares FTSE A50 China Index ETF — launched in 2004 to provide offshore investors with synthetic exposure to China's effectively sealed domestic stock markets — remains king of the hill. But Chinese asset managers offering physically backed ETFs over the past two years have succeeded in grabbing a 30% chunk of an expanding A50 ETF pie, according to a recent research note by Shanghai-based consulting firm Z-Ben Advisors.
For BlackRock and its competitors, positioning their ETF offerings correctly could be a matter of some import this year. While the outcome is far from certain, MSCI Inc. is slated to decide in June whether to include an initial sliver of China's domestic A-shares market in the New York-based firm's widely tracked emerging markets equity index.
In an interview, Peter Alexander, Z-Ben's founder and managing director, said the iShares ETF's relatively high tracking error — reflecting the costs of obtaining synthetic exposure from banks through “China A-shares access products” — has left an opening that the Hong Kong-based affiliates of Chinese managers have moved to exploit aggressively.
BlackRock's fact sheet for its Hong Kong Stock Exchange-listed iShares FTSE A50 shows its performance, after fees and other costs, trailing its benchmark of the 50 largest companies on the Shanghai and Shenzhen stock exchanges by just more than three percentage points a year, on an annualized basis, for the five years through March 31.
By comparison, performance of the CSOP FTSE China A50 ETF, which has gathered more than US$3.5 billion in assets since its August 2012 listing on the Hong Kong exchange, has trailed the benchmark by 1.8 percentage points over its 18 month life, according to a CSOP spokesman.
CSOP Asset Management Ltd., an affiliate of Shenzhen-based China Southern Fund Management Co. Ltd., has been the most successful local manager in the A-shares ETF market, but seven other Chinese money managers have taken advantage of the relatively new renminbi qualified foreign institutional investor program to offer physically backed A-share ETFs.
Launched at the end of 2011, the RQFII program initially allowed only the Hong Kong-based affiliates of Chinese money managers to invest renminbi accumulating in that territory back into China, in pursuit of the longer-term goal of the renminbi's internationalization.
With China's regulators moving quickly to extend RQFII privileges to foreign money managers as well, it's not just Chinese managers that are looking to horn in on BlackRock's A-shares ETF prize now.
In an e-mailed response to questions, Frank Henze, Hong Kong-based managing director and head of exchange-traded funds, Asia Pacific, with State Street Global Advisors, said SSgA got an RQFII license in February and is in the process of designing A-shares offerings now.
“Given that synthetic A-shares products often show high premiums and discounts,” SSgA has refrained from offering them, believing their “disadvantages outweigh their benefits,” said Mr. Henze. But with the introduction of RQFII, “we can now build products that don't suffer” from that volatility, he said.