(An earlier version of this story contained the misleading characterization of the ETF 'PEK' as the only exchange-traded fund listed on the market that focuses on the China A-Shares market. PEK is the only U.S.-listed ETF, but a few dozen others exist, with over 30 of them listed in Asia. A clarification follows.)
Axioma, the indexing firm known for its risk analysis products, plans to develop an index series focused on the China A-shares market in partnership with China Securities Index Co., Ltd., (CSI) in the latest sign that the money management industry is preparing for greater access to companies based in mainland China.
Access to the China A-shares market has been relatively limited so far, though that is likely to change over time, particularly given the new Chinese leadership’s aim to shepherd a transition of the country’s stellar growth of the past generation to a more sustainable pace. The A-shares market includes companies based in mainland China whose shares trade on either the Shanghai or Shenzhen exchanges.
The indexes will be so-called smart-beta strategies that are designed to isolate certain factors, Axioma and CSI—perhaps the most influential China-focused indexing firm—said in a press release. The screens will target both signal strength and investability via a two-step process aimed at capturing a strategy’s return, while ensuring the resulting indexes are replicable.
“In the risk-on, risk-off environment of post-2008, these new indices will help investors by better capturing systematic sources of return in a risk controlled and efficient manner,” Olivier d’Assier, Asia Pacific Managing Director at Axioma, said in the press release.
The family of strategy indexes will be based on the popular CSI 300 Index and will consist of a basket of securities, chosen from the underlying index and constructed with Axioma’s optimization technology and factors derived from Axioma’s China Robust Risk Model. The indices will be distributed by CSI.
The CSI 300 is the very index on which the only China A-shares exchange-traded fund now listed in the United States is based. More than 30 other non-U.S. funds exist, including the $8 billion iShares FTSE China A50 ETF.
That’s the Market Vectors China ETF (PEK), a $40 million fund that operates with an important catch. Its access to the A-shares market is achieved not with actual shares, but with derivative securities that provide “synthetic” exposure that, for better or worse, do add another layer of risk, even if that risk is minimal.
Fund sponsors clearly want to get around that issue, the latest example being Deutsche Bank’s plan to market a fund that will own actual A-shares . It’s not clear that the regulatory deck will ever be cleared to allow for the launch of the db X-trackers Harvest CSI 300 Index ETF, but Deutsche seems to think so.
Whenever that comes to pass is anyone’s guess, but it’s clear that, one decision at time, change is coming that points to a very different future for China investing than the one focused on Hong Kong-based companies that has prevailed so far.
For example, last month, China relaxed foreign flows into mainland markets , an incremental but definite shift that suggests the Axioma index series may well have an increasing number of takers.
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