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http://www.ft.com/intl/cms/s/0/8e497fc4-4d65-11e4-8f75-00144feab7de.html#axzz3G2fXEQEq

Harvest: China fund house feels the vibe of London


Most fund managers will be envious of the sales pitch Peng Choy, chief executive of Hong Kong-based Harvest Global Investments, has at his disposal.

Foreign investors own just 1 per cent of China’s $4.75tn mainland A-share equity market. But if and when the likes of MSCI decide China’s capital markets have become open enough to be included in their mainstream benchmarks, A-shares will account for around 13 per cent of the emerging market universe, and greater China 30 per cent.

Given the benchmark-driven nature of much of the investment world, an avalanche of cash can be expected to ensue.

“Over the next five to 10 years, everybody will have to buy a lot more China. It’s not if, it’s just when,” says Mr Choy.

“China will internationalise the renminbi, probably within the next five to 10 years. The Chinese government wants to have [the capital account] open, but in a manageable way. They don’t want a shock to the system.”

China has been granting foreign investors access to A shares slowly via quotas issued under its renminbi qualified foreign institutional investor scheme.

Domestic groups such as Harvest, a subsidiary of Beijing-based Harvest Fund Management, China’s largest institutional asset manager and third-largest overall, with $50bn under management, have thus far been towards the front of the queue.

But as more foreign groups are granted ever-larger quotas, Chinese houses face a race against time to establish themselves as the “go-to managers” for the Shanghai and Shenzhen markets.

“We are offering access that not many people can give you. That will be watered down over time as more people have access and then everybody does. By then we hope to have established our brand,” says Mr Choy.

A significant plank of Harvest’s brand-building strategy became apparent in September, when it said it would become the first Chinese house to open a base in London, subject to regulatory approval.

A month earlier Harvest unveiled the first actively managed A-shares Ucits fund with daily liquidity, in conjunction with London-based Heptagon Capital, augmenting its range of US and European-listed passive exchange traded funds.

Harvest’s first “baby step” outside mainland China, into Hong Kong, occurred only five years ago. Yet Mr Choy says its move to create a European beachhead “is not a big bold move, it is a natural progressive growth of our business model.

“The largest opportunities will come from European and US investors. You can just fly in and fly out, but if you want to create a long-term business it does not give the impression that you are committed,” says Mr Choy on a visit to London. “We are here to stay and grow. We want to expand our footprint and be closer to clients.”

He expects the new office to be up and running by the end of this year or the first quarter of 2015, and is recruiting an initial 10-strong team, encompassing investment management, compliance and client-facing staff. The boss is likely to be seconded from Asia, but the intention is to recruit most of the team locally.

Mr Choy cites the fact that London was the first city outside Asia to have its own RQFII allocation, as well as the city’s role as an offshore renminbi trading hub, as reasons for choosing it.

“We are beginning to see issuance of renminbi bonds in Europe, dim sum bonds. We need to expand our coverage. A Hong Kong location alone is not enough,” he says. Yet there is more to the choice of London.

“Fund management is a very Anglo-Saxon concept. To me [London] is where the largest talent pool exists. The intention long term is to bring some investment ideas back to China, not just to tap European investors for money,” says Mr Choy.

“This is the right location. It may not be the lowest tax environment or the cheapest or the easiest but, on balance, the vibes of the asset management industry and the growth potential are very similar to Asian markets. The historical relationship, the UK’s presence in Hong Kong, makes us more comfortable being here.”

Amid reports that Harvest’s compatriots E Fund Management, Haitong Securities and CSOP Asset Management are also considering opening European bases – symptomatic of the rise of Asian asset managers – Mr Choy hopes others follow his lead.

“This will set the stage for our peers to come and do the same, and we hope they will. The market is big,” he says.

“Citibank brought some Chinese houses [to London] 18 months ago. Two said they were interested in setting up. Maybe we are a bit more bold. Maybe I am a bit more international and comfortable to jump into the deep end first, knowing I can swim,” says Mr Choy, who opened offices in South Korea, Taiwan, India, Singapore and Hong Kong while with Deutsche Asset Management, Harvest’s joint-venture partner.

Yet all Chinese asset managers are likely to face a battle winning over western investors, who may prefer to build their exposure to the country via the US and European houses they are more familiar with.

Diplomatically, Mr Choy sees eastern and western managers as complementary. “Aberdeen and Schroders can make very good investments in China, but they look with a foreign perspective. The outside looking in and the inside looking out probably gives you the full exposure,” he says.

Mr Choy says Harvest has certain cards in its favour, such as its team of more than 40 analysts and 40 portfolio managers in the Middle Kingdom, who between them cover 700 stocks.

He argues that the largest mainland companies are well covered by international analysts, but such stocks are often in the finance sector or “old” economy, and “that is not where the greatest opportunities are”.

Harvest styles itself as a “growth at a reasonable price”, or Garp, house. Its Ucits fund is based on its Research Select strategy, which has delivered a return of 115 per cent since inception in 2008, far higher than the 40 per cent return of the CSI 300 index, according to company figures.

“Businesses such as ourselves with Chinese heritage clearly have an advantage. This is our bread and butter. We are focused, we don’t do anything else. If we can’t do China well, then there is no hope for us,” Mr Choy says.

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CV

Born 1957

Total pay Not disclosed

Education 1983 MBA in marketing and accounting, McGill University, Montreal, Canada

Career 1983-98 Various roles at Citibank Singapore, New York and Hong Kong

1998-2005 Regional chief executive of Morgan Grenfell Asia, which was renamed Deutsche Asset Management (Asia)

2005-08 Regional head of products and distribution, Prudential Asset Management Asia

2008-11 Deputy chief executive, Fullerton Fund Management

2011 to present Chief executive and vice-chairman of the board of directors, Harvest Global Investments

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Harvest Global Investments

Founded 2009

Assets under management $8bn (September 2014)

Employees 45

Headquarters Hong Kong

Ownership Wholly owned subsidiary of Harvest Fund Management Company