Key takeaways from the SFC’s Asset and Wealth Management Activities Survey

On 25 August 2020, Hong Kong’s Securities and Futures Commission (SFC) published its findings on the annual Asset and Wealth Management Activities Survey for the year ended 31 December 2019 (Survey). The Survey reveals positive industry data from over 800 firms, which demonstrates the asset management industry in Hong Kong continues to thrive amid market uncertainties. The SFC remains, in the words of Ashley Alder, the CEO of the SFC, “committed to further developing Hong Kong as a premier global asset and wealth management centre”.

This article provides some key takeaways from the Survey in terms of the market landscape in 2019, the SFC’s recent regulatory developments and upcoming initiatives.

What does the data say?

The Hong Kong asset and wealth management business posted strong growth in 2019, as evidenced from the following figures:

• Assets under management (AUM): 20% year-on-year increase compared to 2018, reaching HK$28,769 billion.
• Net fund inflows of HK$1,668 billion, more than doubling the figure in 2018.

Below is a macroscopic view of the AUM attributable to the three major components of the asset and wealth management industry in Hong Kong and how they fared in 2019:

 The number of market participants also increased in 2019 as shown in the table below. 

On the product front, as at 31 December 2019, the number of Hong Kong-domiciled funds authorized by the SFC stood at 763, a slight drop of 2% compared to 2018.

The SFC also highlighted a number of “firsts” in the Hong Kong market in 2019 and 2020, particularly in the exchange traded funds (ETF) and leveraged and inverse (L&I) products space, such as:

• first inverse products with a two-times negative factor
• first active ETF
• first ETF authorized as an open-ended fund company
• first batch of swap-based L&I products tracking a Mainland A-share index with a leverage factor up to two-times and negative one-time

Taking a look into the source of funding and where such assets were managed and invested in 2019:

• non-Hong Kong investors remained a major source of funding for the asset and wealth management business (64%) and the private banking and private wealth management business (50%); and
• as in previous years, more than half of the asset management business was managed in Hong Kong, and Asia Pacific remained the most popular investment region amongst Hong Kong managers.

What’s next? 

The Survey showcases recent regulatory developments and provides insights into the SFC’s upcoming initiatives, such as:

• Access between the Hong Kong and Mainland markets: The SFC continues its efforts to promote cross-border offerings of funds between the Hong Kong and Mainland markets via the mutual recognition of funds (MRF) regime. Since the Mainland-Hong Kong MRF scheme was implemented in July 2015, 50 southbound funds and 29 northbound funds have been authorized by the SFC and China Securities Regulatory Commission respectively up to 27 March 2020. The new ETF cross-listing pilot scheme is also set to broaden the spectrum of product choices for investors in the Hong Kong and Mainland markets.
• Hong Kong’s fund vehicles: The possibility of setting up Hong Kong-domiciled open-ended fund companies (OFC) and limited partnership funds (LPF) is a significant development to propel Hong Kong as a preferred domicile for investment funds. The limited partnership fund regime was launched on 31 August 2020. On 2 September 2020, the SFC published consultation conclusions on various enhancements to the OFC regime, including removal of all investment restrictions in respect of private OFCs under the Code on Open-ended Fund Companies to attract the establishment of onshore private funds.
• Real estate investment trusts (REIT): The SFC launched a two-month consultation on various enhancements to the Code on REITs on 9 June 2020. The key proposals include allowing REITs to invest in minority-owned properties, greater flexibility to invest in property development projects and increase in the borrowing limit. The SFC will publish the consultation conclusions in due course.

The Survey also provides a glimpse into how the Hong Kong market has fared in 2020 so far. Unsurprisingly, with the COVID-19 pandemic weighing on the global financial markets, the Hang Seng Index dropped by 16% at the end of March 2020 compared to the previous quarter. Q1 2020 also saw net fund outflows of HK$16 billion from Hong Kong. Whilst it remains to be seen how the global financial markets will recuperate, Hong Kong saw a rebound in Q2 2020 with net fund inflows of HK$27 billion and the activities of the stock and futures markets remain robust.