Date
22 January 2017
David Cumming (center) and Magdalene Miller (right) say it is important for investors in A shares through Stock Connect to obtain direct ownership of the shares. Photo: EJ Insight
David Cumming (center) and Magdalene Miller (right) say it is important for investors in A shares through Stock Connect to obtain direct ownership of the shares. Photo: EJ Insight

Too early for A shares to be in MSCI index: Fund manager

A leading European investment house said it will not support the inclusion of A shares in the MSCI Emerging Markets Index, because foreign fund houses do not directly own A shares purchased through Stock Connect.

“When buying stock through Stock Connect, the ownership of the stock is still fiduciary ownership; it is not direct ownership,” said Magdalene Miller, portfolio manager for China equities at Standard Life Investments.

“In the Stock Connect scheme, we do not own the shares, but the Hong Kong Securities and Clearing Co. (HKSCC) does … we want direct ownership,” Miller said Tuesday.

“If anything happens, we might lose the stocks.” 

The HKSCC is a nominee holder of A shares purchased by investors through the Shanghai-Hong Kong Stock Connect scheme.

Institutional investors have expressed doubts whether the HKSCC would assist the investors, deemed the beneficial owners of the shares, in taking legal action against the underlying listed companies if necessary, since it is just a clearing house.

Regulators in Luxembourg and Ireland, in which many European funds are domiciled, have banned investment funds from investing through Stock Connect, because the lack of direct ownership means investors will have insufficient protection if disputes arise.

Addressing their concerns, the China Securities Regulatory Commission said late last week that it recognized the concept of “nominee ownership” and that foreign investors can exercise their shareholder rights as nominee holders.

But that is not enough to convince Standard Life Investments.

“A lot of our clients do not like the risks. We usually invest money on behalf of clients — not much of the money is Standard Life Investments money,” said David Cumming, global head of equities at the firm.

“The clients will be very wary indeed of us buying shares that we don’t actually own.

“The regulation needs to change, but at the moment, the regulation is stopping global investors.” 

Miller said the regulatory framework still has much uncertainty that needs to be cleared up, so the firm will object if there is a move to include A shares in the MSCI Emerging Markets Index.

She said it is unlikely that such a decision will be made next month.

And even if A shares are included in subsequent months, they will be subject to a “big discount factor”.

“It [the index] may just have 5-10 percent of the total market cap [of A shares]. It’s going to have quite a big discount,” she said.

Headquartered in Edinburgh, with offices in 21 cities worldwide, Standard Life Investments has assets under management of US$383.7 billion.

The fund house has no exposure to A shares.

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JH/JP/FL

EJ Insight reporter

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