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Asset managers rush to launch MSCI index funds ahead of China A-share inclusion

[SHANGHAI] Chinese asset managers, seeking to get ahead of an expected wave of foreign money inflows, are racing to launch index funds that place bets on a select group of mainland stocks, which will be included in MSCI's emerging market benchmark this year.

The first such product to follow MSCI's inclusion announcement in June is Truvalue Asset Management Co's MSCI China stock index fund, which launched after receiving the regulatory green light earlier this month. Launches from other fund managers are also in the pipeline.

While some foreign investors are still haunted by painful memories of China's 2015 stock market crash and concerns about current elevated valuations, a deeper "fear of missing out" is expected to support a surge in mainland stocks.

MSCI's decision last June to include yuan-denominated Chinese stocks, known as "A-shares", into its emerging market (EM) index has already boosted interest in China's banking and consumer heavyweights. But an explosion in funds allowing more focused bets will likely add fuel to China's blue-chip euphoria.

Truvalue fund manager Chen Long forecasts that the partial inclusion would initially trigger 80 billion yuan (S$16.4 billion) of passive investments into China, while an eventual full inclusion will usher in 2.5 trillion yuan of inflows.

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The fund, which tracks the MSCI China A International Index, would enable investors to get ahead of overseas investors "with just one press of a button," Chen said.

Such a strategy has a good chance of success, he said, citing post-inclusion stock performances in markets including South Korea, South Africa and Taiwan.

In June and September, MSCI will add around 230 large-cap Chinese stocks into its EM index in a two-stage process. They will represent a 0.73 per cent index weighting, with MSCI's 5 per cent partial inclusion factor taking China's foreign ownership caps and market accessibility into account.

Truvalue's rivals Invesco Great Wall, PingAn-UOB and Huaan have also applied to launch MSCI index funds, which are among about two dozen such products awaiting the regulatory nod.

Already, foreign funds with existing exposure to A-shares have witnessed a surge in demand.

Four years ago, US asset managers Krane Funds Advisors launched its New York-listed KraneShares Bosera MSCI China A Share ETF. In 2017, this fund saw a 12-fold surge in assets under management to about US$300 million following MSCI's inclusion announcement.

MSCI estimates that a full inclusion could potentially give A-shares an approximately 18 per cent weighting in the MSCI EM Index, enabling China to dwarf many large emerging markets such as Brazil, Russia and India.

Investor concerns centre on some lofty valuations in Chinese stocks, as well as recollections of the 2015 market rout, during which over 1,000 stocks were suspended from trading to avert a deeper meltdown.

A bigger worry, however, seems to be the possibility of having no exposure to China at all.

"Prejudice and information disparity resulted in foreign under-investment in China stocks in the past. The MSCI inclusion is an ice-breaking event that will stimulate foreign demand for A-share allocation," said Wan Qiong, fund manager at Bosera Asset Management.

"As foreigners' understanding of China deepens, global investors will gradually move from underweight China, to equal-weight and eventually overweight."

UBS strategist Gao Ting expects foreign ownership in Chinese A-share market to be raised to 10-12 per cent in the coming years, from less than 2 per cent currently.

Anthony Cragg, senior portfolio manager at Wells Fargo Asset Management, and a veteran China investor, said while many global investors have finally "woken up" to China, funds worldwide remain "massively" underweight.

Victoria Mio, Asia Pacific equities co-head at Dutch asset manager Robeco put it more bluntly: "If you are underweight China, there's a price to pay."


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