State Street’s role as manager of Hong Kong’s largest ETF under scrutiny

Hong Kong’s central bank is working with the supervisory board of the Tracker Fund to review State Street Global Advisors’ role as manager of the territory’s largest exchange traded fund in the territory.

There have been high-level discussions on replacing the manager since it flip-flopped earlier this year on whether to implement the Trump administration’s investment bans on companies linked to the Chinese military.

The Hong Kong Monetary Authority has been working closely with the six-member supervisory committee of the HK$94.43bn ($12.03bn) Tracker Fund of Hong Kong since January, when State Street made a U-turn after originally deciding to divest from the banned Chinese companies.

Hong Kong’s widely read Apple Daily newspaper reported on Wednesday that government officials had commissioned an independent study to review the Boston-based fund house’s role managing the strategically important ETF, which it has done for more than two decades.

This article was previously published by Ignites Asia, a title owned by the FT Group.

This comes at a time when a number of Chinese and local asset managers have made a clear play to try to replace State Street in running the Tracker Fund, which is Hong Kong’s largest vehicle for pension savings, managing money from close to 200,000 retail investors.

“If the supervisory board decides to change the manager, we believe they will make careful evaluation and review different candidates,” the HKMA told Ignites Asia.

The supervisory committee, which has the ultimate power to change the manager and trustee of the ETF, is made up of veterans from different backgrounds including academia, the Hong Kong Stock Exchange and the investment management industry.

A Hong Kong-based senior executive said the situation was getting more and more complicated for State Street and for the supervisory committee, as well as the HKMA.

It is more than a commercial decision, and the decision over which company should manage the Tracker Fund has now become very political, considering the scale of the fund, the operational challenges and duties the manager has to Hong Kong’s largest ETF.

Rebecca Chua, Hong Kong-based founder and managing partner of Premia Partners, said it was premature to say that State Street would be replaced, and the review appeared to be intended to set up a contingency plan and to decide whether the current set-up was the most appropriate for the unit holders of the fund in Hong Kong.

US president Joe Biden is seemingly keen to uphold and even extend the limits on investing in blacklisted Chinese companies, despite appeals from many US financial institutions to scrap the strategy. The US Treasury in January extended the deadline for the ban to take effect until May 27, but Biden has still to decide whether to maintain former president Donald Trump’s executive order that introduced it.

The Tracker Fund was established 21 years ago by the Hong Kong government as a means to dispose of a substantial amount of shares it acquired during the Asian financial crisis. The fund’s assets have dropped significantly from earlier this year, down from HK$107.18bn on January 7, prior to the fallout, to its current size.

CSOP Asset Management and Hang Seng Investment Management have been identified as two of the most likely candidates that might replace SSGA as manager of the Tracker Fund should the decision be made to extend Trump’s executive order.

Earlier this month, CSOP AM launched an ETF tracking Hong Kong’s broad-based Hang Seng index, directly calling out State Street’s moves in January as having caused concerns for investors.

“The response towards the sanctions of the current US background fiduciary manager, who manages the largest HSI-tracking ETF, worried investors as it might bring large tracking errors to the largest HSI-tracking ETF,” CSOP said at the time.

The CSOP Hang Seng ETF has about HK$160.8m in assets under management.

Hang Seng IM’s Hang Seng ETF, which was launched in 2004, only a few years after the Tracker Fund of Hong Kong, has an AUM of about HK$48bn.

State Street said the company did not comment on market rumours.

The company added that State Street invested in all constituent companies of the Hang Seng index for the Tracker Fund of Hong Kong and remained committed to meeting the fund’s stated investment objectives to provide investment results that closely correspond to the performance of the Hang Seng index.

Additional reporting by Selena Li

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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