Chinese investor interest in equities remains tepid

Chinese investor interest in equities remains tepid
By Mark Konyn

Published: May 30 2010 10:23 | Last updated: May 30 2010 10:23

In April I participated in a panel discussion at a conference on current trends in the Asian fund management industry. During the discussion the audience was asked whether the global financial crisis had affected both investor attitudes and fund manager relationships with their distributing partners. All but 10 per cent believed this was the case.

Most noticeably, investors had lost confidence in equities through the crisis resulting in strong flows to bond funds and flows generally out of mutual funds. This trend has continued at different times since, particularly when Asian and global equity markets have been stressed.

Advisors in China confirm this pattern of investor behaviour, with strong flows into money market funds at the end of last year, and flows out of mutual funds as a whole during the first quarter of this year. The latest report shows the industry lost more than 9 per cent of its assets as the Chinese stock market lost more than 6 per cent in the first three months of this year.

Continued downward pressure on China’s stock market, as investors cope with on-going government and central bank efforts to curb speculation and rein-in bank lending, is likely to depress the mainland’s rapidly developing fund industry when margins are under pressure as shelf space among the handful of national distributors remains scarce.

Attempts to restart the market for funds that invest overseas have been met with indifference by China’s investors. It seems the global crisis is likely to have stalled interest in overseas investing for some time, despite a belief among distributors and managers alike that index investing may provide the catalyst.

Curiously, whereas exchange traded funds open up alternative distribution for funds in other parts of the world, in China they are placed inside a mutual fund and distributed through the retail banks, reducing some of their advantages. Hopes that securities companies would develop as a key distribution channel for mutual funds in China have not been realised. It seems the domination of retail banks is set to continue, despite the proliferation of security accounts held by individuals, which was reported to have reached 168m by the end of last year.

In common with the rest of the Asian region, the Hong Kong economy has recorded a strong rebound in the first quarter of the year. This has been accompanied by strong flows back into equity-based mutual funds for Hong Kong, of $6.4bn (£4.4bn, €5.2bn) in the first quarter, with China focused funds accounting for $1.3bn of this total.

Foreign nationals looking to take advantage of the Capital Investment Entrant Scheme and qualify for Hong Kong residency can invest some of the required HK$6.5m ($834,000) into qualifying mutual funds and this is expected to attract continued flows as the scheme matures. The scheme includes Chinese nationals who have established residency overseas, and many wealth management groups are now targeting such people.

Client segmentation more generally is becoming a point of focus for distributors across Asia. The financial crisis is causing the main fund distributors and wealth management groups to rethink their approach to addressing client needs, with greater emphasis on understanding how different investors require different strategies.

The Lehman mini-bond debacle, which saw investors in Hong Kong, Taiwan and Singapore lose money when the investment bank failed, emphasised the need for best advice when approaching clients with sophisticated structures and strategies. Wealth management groups that offered the mini-bonds have been criticised on the basis that clients were unaware of the credit risk involved in such products.

Rather than adopting a single approach to all clients, wealth management groups are introducing different services with varying levels of advice for different clients. There has been a rather muted regulatory response to the financial crisis so far across the region, maybe as the region’s regulators wait to see how the authorities in Europe and the US react. The provision of advice and investor protection is expected to figure prominently in any proposed changes, providing another possible driver of greater client segmentation in Asia.


Mark Konyn is chief executive of RCM Asia Pacific

The Fine Print is Enlarged, But Will Investors Read It?

The Fine Print is Enlarged, But Will Investors Read It?

By JONATHAN CHENG
As governments around the world rewrite banking rules after the financial crisis, Hong Kong's regulators are moving to tackle the biggest local fallout from the crisis here: lax rules on how banks sell financial products to mom-and-pop investors.

On Friday, Hong Kong's Securities and Futures Commission unveiled rules that will enlarge the fine print on complex structured derivatives and restrict banks' and brokers' use of free trinkets and baubles to sell financial products.

The relatively narrow scope of Hong Kong's post-crisis overhaul reflects the limited damage dealt to this city's financial system over the past two years. Banks' conservative balance sheets and a long-time ban on "naked short-selling," among other things, insulated Hong Kong from having to rewrite the rule book.





Protesters demonstrate in Hong Kong in February 2009. More than a year later, few investors are asking about risk.
But Hong Kong's response is telling, too: this city's retail investors were burned by some pretty complicated financial products during the pre-crisis bull market, many of them sold by offering shopping vouchers and other perks along with their structured derivatives.

The product that got the most attention, so-called Lehman minibonds, promised juicy returns while relegating complicated risk warnings to the fine print. The minibonds were tied to well-known Asian conglomerates and issued by a subsidiary of Lehman Brothers Holdings. When the U.S. investment bank collapsed in September 2008, minibond investors were virtually wiped out.

With Hong Kong investors camped outside bank headquarters and old grannies complaining about losing their life savings, regulators brokered a deal under which banks here bought back the minibonds at 60 cents on the dollar.

Government officials promised to re-examine whether sufficient safeguards were in place to govern how complex structured financial products were sold.

The exercise is far from academic. By all accounts, Hong Kong's public hasn't lost its appetite for risky financial products. Bank branch windows hawk currency-linked derivatives with annual returns of 55.21% and 62.8%, and investment seminars dominated last year by concerns about principal protection are focused again on juicing returns.

"After the Lehman incident, a lot of investors were very scared of risk, but now no one asks me about this any more. It's like they've all forgotten," said Ricky Tam, chairman of the Hong Kong Institute of Investors. At one investment seminar he conducted last Wednesday before an audience of more than 100 investors, many of them teachers, risk was hardly an issue, he said.

Mr. Tam welcomed the SFC's new regulations, in particular a "cooling-off period" that allows investors to mull over their purchases and seeks refunds within five working days. The SFC also will require banks to differentiate between those with some financial savvy and those without, and to tailor sales pitches accordingly. Words like "minibonds," which aren't traditional bonds, are out.

Financial products will require five-page "key fact statements" that clearly introduce the derivative and their risks—filling a gap between what SFC Chief Executive Martin Wheatley described Friday as "a 200-page prospectus that nobody ever reads and a one-page flyer with a pot of gold on it and a lot of fine print."

As in the U.S., hitting the right regulatory balance is tricky. Hong Kong banks rely heavily on sales of structured products as a revenue driver, and have resisted further regulation.

At the same time, public anger remains high. Twenty months after Lehman Brothers' collapse, disgruntled minibond investors continue apace with their protests outside the downtown offices of Citibank and other minibond vendors.

Alan Ewins, head of the regulatory practice at Allen & Overy LLP, said regulatory fixes take time to prove their efficacy. "You are going to have to wait and see overall how the market absorbs the regulations," Mr. Ewins said, adding that the cooling-off period and the identification of unsophisticated customers were relatively new ideas.

Regulators will be up against products geared towards Hong Kong's risk-hungry mom-and-pop investors, like ones being offered now by HSBC PLC and Citic Bank International.

HSBC is promoting a structured derivative called "Deposit Plus" that allows investors to reap annual interest-rate returns of 13.5% in a foreign-currency account—provided currencies moves don't sour.

The derivative promises "greater wealth appreciation potential" for customers and enters investors into a "lucky draw" for round-the-world airplane tickets. A disclaimer notes that the derivative isn't a traditional deposit account, despite its moniker, and offers prominent and clearly written risk warnings.

But at no point does the bank warn investors that, should currency movements turn against them, their entire investment could be substantially wiped out. Instead, HSBC lays out three reference scenarios. In one, the investor earns the maximum possible annual interest rate of 13.5%, and in another, the investor would come out just better than even. In the worst scenario presented, the investor is down 0.006%.

Had an investor followed the referenced scenario over a three-month period rather than the brochure's 14-day example, investing HK$300,000 in an Australian dollar-linked "Deposit Plus" account on March 5, he would be down about HK$24,000 today — a loss of about 8%, with a few more days to go.

Bruno Lee, HSBC's Hong Kong-based regional head of wealth management, said in response to questions that "we strive to be transparent in the communication of our products," and that HSBC engages in thorough discussions with customers to guide them to appropriate solutions "rather than pushing a particular product." Mr. Lee added that HSBC welcomed efforts to enhance investor protection and would comply with regulations.

Citic Bank International, controlled by China's state-owned Citic Group, offers a similar "currency-linked deposit" that promises "infinite possibilities with foreign currency investment." Citic dangles the promise of 24.18% annual return, compared to 0.01% with a plain-vanilla fixed-rate deposit. In the four scenarios laid out by Citic in its "pay-off table," the investor makes money or breaks even in the first three scenarios and loses 3.75% in the case of an significant downturn in the New Zealand dollar against the U.S. dollar.

In response to questions, Citic said using the word "deposit" was "in line with market practice" and that the derivative has many elements of a traditional deposit. Citic also says that its risk warning section is adequately clear and that, in any case, if a customer were to sustain a loss, the customer could opt to hold onto its investment in hopes of a rebound.

Citic adds that it has enhanced its assessment of a product's suitability for its customers, that it makes audio recordings of the selling process and that it now physically separates investment services and general banking services in its branches.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

HKMA to banks：go on, gouge your customers

HKMA to banks：go on, gouge your customers


Good news for Hong Kong's most rapacious banks: as far as the Hong Kong Monetary Authority is concerned, they can continue to gouge their customers - just so long as the victims are not more than 65 years old, that is.

Yesterday, the HKMA sent a circular letter to the city's banks ordering them to give retail investors in complex derivative products a two-day cooling-off period during which customers can change their minds and back out of purchases.

On the surface, the new rule looks like a significant advance in investor protection. In reality, however, yesterday's circular represents a major victory for the banks in their campaign to resist stricter regulation. The rule it sets out is so watered-down it is hardly worth bothering with.

A mandatory cooling-off period was originally proposed as one of a number of measures intended to protect retail investors following the Lehman Brothers minibond scandal and its revelations of how banks used dishonest techniques to peddle risky structured products to vulnerable customers.

In its consultation document published for comment in September last year, the Securities and Futures Commission suggested a window of between two days and three weeks during which the buyer of an investment product who subsequently had second thoughts could cancel his purchase and receive a full refund minus a reasonable administrative fee.

Although other jurisdictions have similar provisions, the SFC's proposal for such a cooling-off period provoked squeals of protest from Hong Kong's banks.

They maintained that a cooling-off period would introduce a perilous element of moral hazard into investment decisions. They complained that it would allow customers to back out of purchases if the market moved against them or if they found they could get a better offer elsewhere.

What's more, the banks argued that if they had to buy structured products back from their clients, they would be forced to unwind their positions in the underlying instruments, which in illiquid markets would take a long time and be prohibitively expensive.

Neither objection held water. A penalty fee to cover bank administrative costs should an investor back out would have dealt with any danger of moral hazard.

And complaints about the difficulty of unwinding positions were nonsense. Structured products are typically sold over an offer period lasting about a month, with the proceeds only invested once the offer period has ended. So refunding an investor at any point up to a final cut-off involves nothing more complicated than an administrative headache.

The real reason why Hong Kong's banks objected to a cooling-off period was altogether simpler. They were afraid that without a salesman breathing down their necks, customers might change their minds about buying complex and risky structured products like minibonds and demand their money back, which would mean the banks would lose their commissions on the sales.

Still, the banks' arguments clearly carried weight with the HKMA, which yesterday decreed that the only customers to enjoy a cooling-off period would be the elderly aged 65 years or over and first-time investors sinking more than 20 per cent of their savings into a single structured product.

In fact, this provision is not even as generous as it seems. Although banks are required to collect all sorts of documentation from customers showing they are experienced investors, they are allowed to take the customers' word for it that they are not investing more than 20 per cent of their net worth in a single product.

You can imagine how the conversation would go:

Bank salesman: Look, the only way I can let you buy this limited-edition super-safe, high-yield minibond is if you go home and fetch full copies of documents showing you have invested in the same sort of thing before.

Customer: That's a real fag. Isn't there another way?

Salesman: Well, yes, there is now that you mention it. You can just sign this declaration that you are investing less than 20 per cent of your net worth and I can let you have your minibond right now.

Customer: Please may I borrow your pen.

In other words, instead of covering everyone, the HKMA's two-day cooling-off period only really applies to investors over 65, a relatively small proportion of the banks' customer base. The banks must be delighted.

It may be outrageous that the HKMA has watered down a consumer safeguard measure in this way, but it is hardly surprising.

The HKMA's mandate as Hong Kong's bank supervisor is to maintain a strong and stable banking system. Protecting customers' interests barely figures as part of its job.

Quite the opposite in fact: the HKMA wants Hong Kong's banks to be financially as strong as possible, which means it wants them to maximise their profits, even if that means selling high-risk structured products to ordinary retail customers.

Clearly, there is a major conflict of interest involved if the regulator responsible for banking system stability is also charged with protecting customers' interests.

This conflict was implicitly recognised in Britain last week when the new government handed the job of prudential supervision of the banking system to the Bank of England, while leaving the Financial Services Authority with responsibility for investor protection.

The sooner Hong Kong recognises a similar conflict the better, and the sooner we will see an end to watered-down investor protection regulations like yesterday's feeble circular letter from the HKMA.

tom.holland@scmp.com Copyright (c) 2010. South China Morning Post Publishers Ltd. All rights reserved.

Caution sees ‘bells and whistles’ products wane

Caution sees ‘bells and whistles’ products wane
By Robert Cookson

Published: May 9 2010 18:29 | Last updated: May 11 2010 18:39

More than a year has passed since the collapse of Lehman Brothers in September 2008, but shockwaves from its demise are still reverberating through the world of retail structured products in Asia.

Investors across the region – in particular those in Hong Kong and Singapore – lost billions of dollars they had invested in complex structured products linked to the failed US investment bank.

EDITOR’S CHOICE
Investors demand more transparency - May-11Private bank clients approach sector with caution - May-11Securitisation engine grinds down - May-11Drag of structured debt is impossible to ignore - Nov-28Scramble to handle structured credit - Sep-23ADCB action cuts to the heart of the credit boom - Sep-08In Hong Kong, the backlash against distributors of Lehman “minibonds” and other structured products that turned sour has lost much of its initial fury – thanks in part to a government-brokered settlement in which 16 banks paid aggrieved investors more than HK$6.3bn (US$811m, £534m, €618m) in compensation.

But even now, the local branches of some global financial groups are regularly picketed by investors carrying placards emblazoned with “devil bank” or similar slogans.

The protests, lawsuits, and compensation awards are the most visible signs of the turmoil that has ransacked Asia’s structured products industry over the past two years.

Behind the scenes, industry sources estimate that sales volumes in Asia have collapsed to about a quarter of the $250bn seen during 2007.

Investors have become much more cautious about what products they buy, while regulators in Hong Kong and Singapore have clamped down on the sales practices of distributors. As a result, the most complex products – the most lucrative for banks – have disappeared from the market.

“People are much more careful now,” says Peter Chan, chairman of the Alliance of Lehman Brothers Victims. “It’s much more difficult for banks to sell these kinds of products.”

Before the financial crisis, one banker explains, Asian investors were sold products with “all sorts of bells and whistles”.

Take the final series of Lehman minibonds. Investors who bought them in effect put up cash to underwrite credit default swaps on a bundle of senior and subordinated debt from blue-chips including HSBC, Hutchison Whampoa and Standard Chartered.

Other products that were popular during the boom years included structured notes that were linked to property indices or complex baskets of stocks based on themes such as healthcare or water.

“Nowadays, the products are getting much simpler and clients want products that are easy to understand,” says Min Park, Asia head of equity derivatives and convertibles at Credit Suisse.

Credit Suisse is one of several investment banks that create “white label” structured products for intermediaries, such as private banks, which sell them on to the end investors.

Industry sources say profits in this part of the industry have collapsed – due to the double whammy of low volumes and low margins on simple products. Some groups only keep their operations alive to maintain client relationships and in the hope that volumes will bounce back.

Yet there are some signs of hope for the industry.

“Since the second quarter of last year volumes have started to recover in certain markets, especially in Japan and Korea,” says Mr Park.

In Korea, total volumes tumbled 70 per cent in 2008, Mr Park estimates. Since then activity has picked up, he says, and volumes are now only 30 to 50 per cent below their 2007 peak.

Big markets such as Hong Kong and Singapore remain depressed, especially in the retail segment. In Taiwan, too, volumes are down an estimated 80 to 90 per cent from the 2007 peak after the local regulator clamped down on the market.

Volumes are recovering, especially in the private banking industry, says Thomas Fang, acting co-head of risk management products in Asia for UBS.

“Coming into 2010, clients [intermediary banks] are more positive, projecting growth for their business of anywhere between 20 to 50 per cent, depending on their client segment and region,” Mr Fang says.

The most popular products these days are ones that are liquid, transparent and simple – including warrants, exchange traded funds (ETFs), and other listed products. In terms of over-the-counter products, clients are looking for simpler structures and shorter tenors than they were in 2007.

For example, in Hong Kong’s private banking industry about 60 per cent of total structured product volumes are now comprised of equity-linked notes (ELNs) with a maturity of one month, according to one person.

Industry executives expect products will again become more complex over time and volumes will continue to rise.

“Investors have a genuine need for structured solutions,” says Mr Fang.

RPT-UPDATE 1-Ex-Lehmanites start distressed CDO, CDL fund

RPT-UPDATE 1-Ex-Lehmanites start distressed CDO, CDL fund
Thu May 13, 2010 11:20pm EDTRelated NewsFormer Lehman execs launch distressed structured credit fund
Thu, May 13 2010
Former Lehman execs launch distressed structured credit fund
Thu, May 13 2010
Hedge fund Fortress eyes Asia comeback: sources
Tue, May 4 2010
U.S. hedge fund Fortress eyes Asia comeback: sources
Tue, May 4 2010
UPDATE 2-US hedge fund Fortress eyes Asia comeback - sources
Tue, May 4 2010(Repeats item first filed late on Thursday)

Financials

* Two former Lehman bankers aim to raise $50 mln in new fund

* Oracle Investment Fund focused on CDOs, CLOs (Adds details, founder quotes, background)

By Parvathy Ullatil

HONG KONG, May 13 (Reuters) - Former Lehman Brothers Asia executives, who headed the bank's strutured products division and its syndicate business, have launched a hedge fund that will invest in distressed structured credit assets.

Oracle Capital aims to grow assets to $50 million over the next few months, said Fredric Teng, one of founders of the company.

The fund has received backing from a U.S. institutional investor and has also received investment from some institutions in the region and former senior executives from Lehman Brothers.

Institutional investors have shied away from putting their money in start-ups in Asia in the wake of the financial crisis despite the high pedigree of many of the new managers behind these funds.

"Our fund is a new and specialized strategy which might make it harder to tick some of the boxes for institutions, so the fact that we raised institutional money is very encouraging," Teng said.

The fund is looking to invest in collaterlised debt obligations (CDOs), collateralized loan obligations (CLOs) and other structured credit paper, that were hugely popular in Asia till the financial crisis hit, hammering these assets.

"While there is a lot of negative press surrounding CDOs, many people recognise that there are a lot of opportunities in that market after the dislocation that we have seen," said Teng's partner, Leon Hindle.

Hindle ran Lehman's structured products division in Asia, which gained notoriety after one of its derivative products, dubbed "minibonds", tanked following the Wall Street bank's collapse in 2008, burning tens of thousands of retail investors in Hong Kong and Singapore.

"People can criticize CDOs and structured products, fairly or unfairly, but if you want to be a fund manager managing these products you really need to have been involved in the CDO business," said Hindle. (Reporting by Parvathy Ullatil; Editing by Lincoln Feast)

10大議員排名 葉劉淑儀登榜首

我以前買過由上海商業銀行的花旗銀行ELI, 不過我沒有渣打ELN
葉劉淑儀同我開會時說過, 渣打ELN是用公司條例私人配售買給普通客戶, 沒有通過証監處, 而且是用2003年唐英年的新法案, ELN 有20年是錯的. 葉劉淑儀也要求立法局查唐英年的新法案。


有私人銀行如荷蘭銀行、恆生銀行、花旗銀行、瑞士銀行是有私人配售買給私人戶囗客戶ELI, 不過上海商業銀行是沒有私人銀行戶囗而配售ELI, 而我也通知金管局及警方這是否有問題. 但因官商勾結, 沒有人理會. 現在我只知大姐明是有上海商業銀行的雷曼ELN。


渣打私人銀行九七後買給瑞士銀行, 現在我並沒有看見渣打有沒有私人銀行, 不過渣打ELN 苦主金管局「投訴成立」可能是用公司條例私人配售買給普通客戶。

Court rejects minibonds investor's request to force regulatory action

Court rejects minibonds investor's request to force regulatory action


A court has turned down a request by a minibonds noteholder to overturn decisions by regulators who she says failed to take proper action after investors lost billions of dollars.

Hong Kong investors have alleged they were mis-sold minibonds guaranteed by American investment bank Lehman Brothers, which went bankrupt in September 2008.

Shek Lai-shan, 49, who bought HK$40,000-worth of minibonds from Bank of China, had filed an application at the Court of First Instance for a judicial review of a decision by the Securities and Futures Commission to discontinue its investigations into the banks, and an alleged decision by the Monetary Authority to defer doing so and not to take enforcement action.

But the court judgment yesterday said that to quash and declare unlawful the decisions would disrupt noteholders who had settled with banks, and force the regulators to breach an agreement with them.

The decision to halt action was part of a deal in July last year in which 16 banks that had sold the notes agreed to buy them back at a discount from their principal value.

Shek had rejected the offer and filed the application as a test for tens of thousands of other investors. The Alliance of Lehman Products Victims supported her case financially.

Minibonds are not corporate bonds, but consist of high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.

Mr Justice Andrew Cheung Kui-nung said that declaring any decision by the regulators unlawful would force them to act in blatant disregard of obligations with the banks.

Further, quashing those decisions would jeopardise the repurchase agreements that 24,482 noteholders had reached with the banks, totalling HK$5.2 billion, the judge said. He said: The potential magnitude of the monetary impact is ... enormous.

He said the allegation that the Monetary Authority decided to defer its investigation was wrong, and said there was evidence that the SFC had completed its investigations regarding the Bank of China before the agreement was made.

The judge said Shek's case did not have a realistic prospect of success.

Alliance member Peter Chan Kwong-yue said the group was disappointed with the ruling.


01 May 2010