Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar's Head of Manager Research for EMEA and Asia, Wing Chan.
Hi, Wing.
Wing Chan: Hi.
Wall: So, we're here today to talk about the inclusion of A shares into the MSCI indices and their impact on active funds. Because a lot has been reported about how they will impact passive funds. Because ETFs and passive funds that track those particular indices will be made to buy the stocks that are now included in them because, of course, that's what tracker funds and ETFs do. But what about the impact to active fund managers who invest in this region in China, in Asia and in emerging markets?
Chan: Sure. And I suppose, like, if we think about the headline news happening around the index inclusion is probably more of a headline for the passive strategies primarily because you have to do the rebalancing closer to that effective day. But whereas, if you are talking about an active fund, a lot of these managers have already been in preparation for A shares inclusion into global indices for some time.
We are talking about a lot of the major asset managers like JPMorgan, like Fidelity, they have been establishing their presence in Chinese market, like Shanghai for a number of years now and obviously, UK managers like Schroders as well, they have a presence onshore in China. And also, I suppose some of the names that might be lesser known to investors, like Robeco, they have a team in Shanghai researching A shares.
I think in terms of active managers, they have doing this in preparation recognising obviously China in the future. If you think about the foreign 100% index inclusion, you are talking about China's importance as important as the US, in terms of China's importance in emerging markets relative to US importance in developed markets.
Wall: I think the concern for a number of investors when they see these headlines, A shares included in MSCI indices, are that fund managers, active fund managers, are going to be upping their exposure to an area of the world that they have concerns about due diligence, about corporate governance. There have been some high-profile fund managers who have come a cropper investing in Mainland China shares. But I suppose the beauty of active fund management is that they can be selective about which companies they choose to invest in in the region?
Chan: Yeah, that's exactly right. And I think to some extent their concern is right. If we go back to August 2015, where we had the volatility around the renminbi and we had a fair bit of volatility around emerging markets, we had a good number of shares listed on A share market actually suspended trading for extended period of time. So, to some extent, that concern is valid. But at the same time, the managers that we've been speaking to who are investing in A shares, they conduct the same kind of investment process and due diligence they do – no matter whether they invest in H shares or A shares. In fact, we have actually had some instances in H shares where the companies have had corporate governance issues as well. So, I think, you brought in a good point. Certainly, it is important to be selective when you are investing in emerging markets no matter whether you talk about H shares or A shares.
Wall: And I suppose also there just comes a point where you have to accept this is the way that the market is moving. China is a huge investable arena and the fact that we are now able to have access to some of these incredible companies – I mean, look at the leading tech companies in the world, arguably they are no longer in the U.S. They are in this part of the world, they are in China. And with the opening up of this market with A share inclusion in MSCI but also with the Shanghai Stock Connect, it's actually a positive thing that investors globally can get access to these companies?
Chan: Yeah, certainly, in terms of opportunity set as well. I mean, just to share some numbers, we are talking about the H shares historically having a market cap of around $800 billion. Asia has expanded about tenfold, right. And also, in terms of sector exposure as well, you look at a lot of the H shares that are listed in Hong Kong, they're very much focused on financials, talking about the banks and insurance companies and also some of the SOE companies in telcos and material energies and so forth.
But once we got to the A share market, we see it's actually a lot more diversified in terms of sector exposure and also provides a lot of opportunities for managers to sort of fish, if you like, for good ideas. A lot of the names, for instance, like, Maotai, which is a wine producer in China and also, one of the largest air conditioner manufacturer, like, Gree Electronics. I mean, these companies are only listed in the A share market. And we are seeing managers sort of taking great advantages of the rising consumption in China as well by having exposure in these kinds of consumer-related names.
Wall: Wing, thank you very much.
Chan: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
