Pedestrians pass by a display showing the Hang Seng Index level in Hong Kong on Sept 15, 2020. (PHOTO / AP)
The Hong Kong Monetary Authority is asking State Street Corp’s Asia unit to clarify how it plans to address the effect of US sanctions on its US$13.5 billion exchange traded fund.
The Tracker Fund, which traces the Hang Seng Index performance and is Hong Kong Special Administrative Region’s most actively traded ETF, includes shares of Chinese mainland entities covered by the sanctions. The HKMA said that State Street Global Advisors Asia Ltd should take all feasible and necessary measures to mitigate impacts on the fund.
The remarks came after former HKMA chief Joseph Yam said that State Street is no longer fit for its duty as a manager for the ETF. US banks and money managers are responding to a US ban, imposed by then President Donald Trump, on investment in companies deemed to be linked to China’s military.
State Street said Monday that the Tracker Fund won’t make any new investments in a sanctioned entity
State Street said Monday that the Tracker Fund won’t make any new investments in a sanctioned entity. The fund is no longer appropriate for US investors, it said in a statement, adding it will continue to assess the situation. Kate Cheung, a Hong Kong-based spokeswoman, said the company has no further comment for now.
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The risk is that the largest ETF on the Hang Seng Index will become less able to track the gauge if it pares investment in such companies.
“As this goes forward, the Tracker Fund will no longer perform in line with the Hang Seng Index and will create for itself a significant tracking error,” said Stewart Aldcroft, chairman of Cititrust Ltd “Institutional investors, if they see an alternative, will switch.”
Activist investor David Webb suggested that the Supervisory Committee choose a non-US manager to handle the fund, otherwise it will no longer be able to track the Hang Seng.
Hang Seng Bank Ltd provides a competing product that’s about half the size of the State Street ETF. The Tracker Fund was set up in 1999 to dispose of shares acquired by the HKSAR government in its fight against speculators during the Asian financial crisis. It’s now widely used by institutional investors as a proxy for the HKSAR stock market or to hedge risks.
Retirement System
The issue may also affect Hong Kong’s pension industry, given that eight of the city’s 18 Mandatory Provident Fund Scheme sponsors provide the Tracker Fund as an investment option, according to MPF Ratings Ltd. Among those include plans provided by Principal Trust Co (Asia) Ltd, Fidelity and Invesco Ltd, according to the website.
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“This will have a significant impact on MPF members,” said Francis Chung, chairman at MPF Ratings. “If the Tracker Fund can no longer replicate the Hang Seng Index, then trustees of MPF schemes must exercise their fiduciary duty and review if it is still fit for investors.”
MSCI Inc and S&P Dow Jones said last week they would drop Hong Kong-traded shares of China Mobile, China Telecom Corp and China Unicom Hong Kong Ltd from benchmarks. That prompted index-tracking funds to unwind positions at short notice, pushing the shares’ trading volume to 18 times the daily average of the previous three months.
BlackRock Inc also reduced its holdings and plans to keep selling, a person familiar with the matter said this week. The world’s largest money manager has an ETF that tracks the Hang Seng.
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