Following the launch of China Post Global, the international asset management arm of China Post & Capital Fund Management Company Limited (China Post Fund), SRP spoke to its managing director, Danny Dolan (pictured), about the firm's plans to build its offering on the back of the former Royal Bank of Scotland's (RBS) European Exchange Traded Fund (ETF) range which was acquired by China Post Global (UK) Limited in March 2016.
"In 2015 we suggested to RBS's management that the ETF business had no viable future under the existing set up," says Dolan. "RBS decided to look for parties interested in taking the ETFs forward. A number of firms expressed strong interest, including existing ETF providers, mutual fund houses, private banks and private equity firms, which is testament to the attractiveness of the Market Access ETFs, and ETFs generally."
According to Dolan, the board of directors of Market Access decided that China Post Global was best placed to take over the funds. "China Post Global committed to growing the size of the existing ETFs, including injecting capital into the smaller ones, and also to launching new Market Access ETFs," says Dolan, adding that China Post Fund is the domestic Chinese asset manager co-owned by China Post Group, one of China's largest state-owned enterprises, Capital Securities (the brokerage arm of Capital Group, another large Chinese state-owned enterprise) and Sumitomo Mitsui Banking Corp (the world's 6th largest investment bank). "China Post Fund is the first listed asset management company in China, following its listing on the National Equities Exchange & Quotations in 2015," says Dolan.
Dolan managed RBS's structured funds team until early 2016 when the UK bank decided to offload this part of the business, the only remaining asset from the UK bank's structured retail investor products and equity derivatives (IP&ED) business which was sold to BNP Paribas in 2014. Prior to RBS, Dolan was an executive director at Nomura, originating and managing structured funds for a variety of global markets. This followed several years of structuring equity and fund derivatives for Nomura's institutional and retail business in Europe and Asia. Before this, Dolan worked at Merrill Lynch in Frankfurt, London and Dublin in structuring and sales roles.
After the acquisition, China Post Global sought to retain the experience and skill set of those who had been managing the ETFs, and hired Dolan and several of his team to manage the existing ETFs and bring new ones to market.
China Post, says Dolan, will benefit from the Undertakings for Collective Investments in Transferable Securities (Ucits) brand as it is "the gold standard for fund regulation in Europe and globally".
"The Market Access ETF offering was an excellent fit for China Post Global's strategy," says Dolan. "They are Ucits compliant and have a track lengthy track records of up to ten years. They track commodities and emerging markets, both of strong interest to Chinese investors who are an important part of our target market. We plan to launch complementary new ETFs on mainland Chinese equities and fixed income and on smart beta strategies," he says.
"The Ucits brand is very strong in Asia, and there is increased demand for Ucits funds, especially Ucits ETFs, from Asian investors," says Dolan. "Ucits ETFs are an attractive vehicle for Chinese investors who are looking to invest in overseas markets, and for European investors who would like to invest in China."
One of the goals China Post Global (UK) is to provide investors with exposure and access to the Chinese economy, according to Dolan. "The Chinese economy continues to offer attractive investment opportunities, however China is underweighted in many European investors' portfolios," says Dolan. "Significantly, it is also underweighted in global equity indices to which many European investors are benchmarked."
Currently, China's weighting in global equity benchmarks is typically 2.5% - 3%, says Dolan, adding that these weights are expected to increase to 10% - 17%, "depending on the index methodology, due to the ongoing opening-up of the Chinese economy".
"Because of the sheer volume of assets tracking these global benchmarks, there will be massive inflows into China," says Dolan.
The challenges in the ETF market are mainly around the assets under management (AUM) and the liquidity of the strategies, says Dolan. "Reaching US$50m in AUM is a key challenge in getting an ETF off the ground," he says. "China Post Global has already committed to inject capital into those Market Access ETFs that are below US$50m in size."
This capital injection will make all Market Access ETFs eligible for the institutional investor bases of China Post Global's parent companies, says Dolan. "Our aim is to increase the size of the existing ETFs above US$100m and use the increased size to help open doors in Europe," he says.
In terms of on-exchange trading, the firm's primary focus in Europe will be Germany's Xetra and the Swiss SIX exchange "which represent over 90% of the turnover of Market Access ETFs". For both stock exchanges, China Post have a new market making partner - KCG (formerly Knight Capital), which has brought a "significant improvement" in the liquidity of the funds, including tighter bid-ask spreads and bigger quote sizes.
"We are also bringing several further Authorised Participants on-board, including Goldman Sachs, Jane Street, Commerzbank and Flow Traders," says Dolan. "Our aim is to offer investors a broad selection of trading partners and a competitive secondary market."
Another area of focus for China Post Global is optimal tracking. "The new swap counterparty we have appointed - Goldman Sachs - offers very competitive swap pricing which translates into a reduction of up to 40bps per annum in the total cost of ownership of Market Access ETFs," says Dolan.
China Post Global is also expected to benefit from this partnerships to grow its Market Access range by launching new ETFs. "The European ETF market is well positioned to continue growing strongly as investor knowledge and experience of ETFs increase," says Dolan. "The Chinese ETF market even more so; it is still at a relatively early stage of its development, so the potential is huge."
From a product development perspective, China Post Global expects smart beta strategies to continue attracting new investors, and to add significant value by combining the best elements of passive and active management.
"We are in discussions with index providers and our distribution partners to finalise a number of new launches for Q3," says Dolan. "The new products will be smart beta ETFs with a focus on on-shore Chinese equities and fixed income.
According to Dolan, China Post Global is very well placed to offer innovative smart beta products that provide access to Chinese equities and fixed income. "While ETFs giving exposure to China and smart beta strategies already exist, no-one in Europe has yet combined the two," he says. "Other differentiators for us include our access quotas to mainland Chinese securities, the strength of our parent companies and their distribution networks, and the strong financial engineering background of our team, which will help with product construction."
China Post Group provides postal services to over 1.4 billion people and has a vast distribution network in China, and is one of the best known brand names in China. "We are leveraging the brand name and the Qualified Domestic Institutional Investor (QDII) networks of our parent companies," says Dolan. "We have hired ETF sales specialists in Asia and in Europe (link to story) to drive our distribution in both regions."
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