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Cailianshe News, August 14 (Reporter Zhou Xiaoya)Once regarded as a niche track, investment enthusiasm for mutual recognition funds is gradually increasing.

On the one hand, since August, some mutually recognized funds have announced the suspension of subscription because the sales volume in the mainland is close to the 50% quota limit; on the other hand, a number of institutions have stepped up their efforts to operate mutual recognized funds, announcing fee reductions on direct sales platforms, adding new sales agencies, and participating in fee discount activities of sales agencies.

In the eyes of industry insiders, mutual recognition funds are currently a blue ocean market, and the market potential can be easily seen from the gradually increasing scale this year. Among them, the follow-up investment opportunities of bond-type mutual recognition funds, which account for a relatively large proportion of the scale, are also worth paying attention to. Some institutional insiders believe that the pricing of US bonds often becomes a reference for other bond markets, and the yields of Asian bonds are often at a premium compared to US bonds, so subsequent investments need to pay attention to exchange rate risks.

Bond mutual recognition funds close down

Recently, some bond mutual recognition funds have announced the suspension of subscription. Gaoteng Micro Fund-Gaoteng Asia Income Fund announced that it would suspend subscription from mainland investors from August 9. The announcement mentioned that the sales scale of northbound mutual recognition funds in the mainland should not exceed 50% of the total assets of the fund. If the percentage reaches 47%, it has the right to decide whether to suspend subscription. If it exceeds 50% on a certain trading day, mainland subscription will be suspended until the conditions for northbound mutual recognition funds are met again.

This is the second time this year that China Asset Management Selected Fixed Income Allocation Fund has suspended subscriptions from mainland investors. The most recent suspension was on August 5, because by the end of August 2, the fund's mainland sales accounted for 45% of the fund's total assets. August 2 was also the first day that the fund resumed subscriptions from mainland investors.

Morgan Asia Total Return Bond Fund also stopped accepting subscriptions from mainland investors from August 2; E Fund Jingde RMB also announced the suspension of subscriptions the day after it resumed subscriptions in early July.

"The frequent suspension of subscription for northbound mutual recognition bond funds mainly reflects the domestic investors' demand for allocation of relatively high-yield overseas assets in an environment where the interest rate gap between China and the United States is relatively high." He Zhe, fund manager and director of the FOF investment department of HSBC Jinxin Fund, analyzed that on the one hand, the domestic bond market yield continued to decline to a historically low level, which increased investors' concerns about the continued decline in bond yields and bond market volatility.

On the other hand, with the Federal Reserve expecting a rate cut, U.S. Treasuries are expected to perform well, which will also increase domestic investors' interest and demand for U.S. dollar bond products.

Schroder Investments also believes that some bond funds in the mutual recognition funds have small stocks in Hong Kong, so according to relevant regulations, the saleable capacity in the Mainland is also limited, so purchase restrictions may be triggered frequently in the near future.

Zhang Xin, director of the international business department of Morgan Asset Management (China), mentioned that the main tool for domestic investors to allocate overseas markets is QDII products. In the recent situation of tight quotas, mutual recognition of debt funds will attract more attention from investors than other strategies.

What are the differences between investment opportunities such as Asian bonds and US bonds?

The purchase restrictions on northbound mutual recognition bond funds appear in products investing in Asian bonds and US bonds, and the difference in investment opportunities between the two has also become a focus of market attention.

He Zhe analyzed that most mutual funds that invest in Asian bonds are essentially medium-term credit-type US bond funds, and their returns come from three parts: credit spreads, US benchmark interest rates, and exchange rates. "Logically speaking, under the assumption of a soft landing of the US economy, its returns are the best. In this case, the economy maintains strong resilience, its credit spreads will not widen, and exchange rate fluctuations will not be large; under the expectation of interest rate cuts, there will be continuous coupons and capital gains. Therefore, a soft landing of the US economy is the logic behind our purchase of such products."

In his opinion, as the Federal Reserve enters the interest rate cut channel, combined with the soft landing of the economy, the winning rate of related products in the future is relatively high; but special attention should be paid to exchange rate risks. In addition, if the logic of the US recession is confirmed, it will also have a greater impact on high-yield bonds because the interest rate spread will widen.

"Since the United States is a developed country, its economic growth and inflation levels are different from those of Asian countries, and its nominal interest rates are usually lower than those of Asian countries. Therefore, under the premise of the same credit quality, Asian bond yields often have a premium compared to U.S. bonds." Schroder Investment explained that because the information on the Federal Reserve's monetary policy is relatively transparent, the pricing of U.S. bonds often becomes a reference for other bond markets, and the Federal Reserve's monetary policy has also become a weather vane for interest rate changes in Asia or other emerging markets.

Looking ahead to investment opportunities in the overseas bond market in the future, the agency believes that the selection of bond types is crucial. They analyzed that in the fourth quarter of 2023, the global bond market had already responded to the expectation of a US interest rate cut in 2024, causing a sharp rise in bond prices; but in the first half of 2024, due to the US's delay in cutting interest rates, the performance of long-term bonds did not meet expectations.

Although the risk of a recession has increased, a "soft landing" of the economy remains their basic assumption. "We don't think the Fed will cut interest rates immediately, but the repricing of this wave of bond interest rate declines seems to have been overcorrected, and part of the premium reflecting the recession will be returned. From a strategic perspective, the current valuation of U.S. Treasury bonds is unattractive."

They are cautious about global bond portfolios, believing that unless market expectations of a recession continue to rise, long-term bonds have limited room for appreciation. The positive economic policies of the US election have also reduced the possibility of a medium-term recession to a certain extent.

The number of mutual recognition fund sales agencies has increased and the fees have been discounted

While some products have been suspended from subscription, the overall operation of northbound mutual recognition funds has also been strengthened. On August 13, Tianhong Fund announced that, effective immediately, Jingdong Kentray will be added as the sales agency for Xingjian Hongyang China Fund, Swiss Pictet Strategic Income Fund - HM RMB Category, UBS (Hong Kong) China Opportunities Equity Fund (USD), and East Asia Lianfeng Asian Strategic Bond Fund RMB (Accumulation), and will open subscription and redemption services and participate in their rate discount activities.

Public data shows that the above four funds are all northbound mutual recognition funds. On the official website of JD Finance, the subscription fees of these four products are all 10% off. For example, the purchase fee rate of the East Asia Union Asia Strategy Bond Fund RMB (Accumulation) was originally 1.5%, but now it is 0.15%.

In addition, HSBC Jinxin Fund also announced that in order to thank the majority of investors for their long-term trust and support, after consultation with JD Kentray, it was decided that from August 12, 2024, its three northbound mutual recognition funds, including HSBC Asian Bond Fund, HSBC Asian High Income Bond Fund, and HSBC Asian High Yield Bond Fund, a total of 10 share categories will participate in JD Kentray's subscription fee preferential activities.

The announcement shows that from August 12, 2024, investors who subscribe to the above 10 fund share categories through JD Kentray can enjoy a subscription fee discount of 0.1%. For example, the purchase fee rate of HSBC Asian Bond BCH-RMB has been reduced from 2% to 0.02%.

Morgan Fund announced a 0.1% discount on subscription fees or application fees on its direct sales platform. As the domestic agent of the Northbound Mutual Recognition Fund, part of the shares of the six Northbound Mutual Recognition Funds it represents also participate in the rate discount activity.

In addition, ABC-Huarong Fund Management also announced in August that HSBC Insurance Brokerage was added as the sales agency for some share categories of two northbound mutual recognition funds. In August, Tianhong Fund added Tiantian Fund as the sales agency of UBS (Hong Kong) China Opportunity Equity Fund (USD) and participated in its rate discount. In August, some fund share categories of Hongshou High Yield Volatility Management Bond Fund, which Huabao Fund represented, also added JD Kentray as the sales agency.

Overall, since August, the northbound mutual recognition funds have issued more than 40 announcements related to adding sales agencies, participating in sales agency rate preferential activities, etc. Guosen Securities, JD Kentrey, Industrial Securities, China Merchants Securities, BOC Fund Direct Sales Counter, Morgan Fund Direct Sales Platform, Harvest Wealth Management, Hang Seng Bank, Tiantian Fund, HSBC Insurance Brokerage and many other institutions have added sales of northbound mutual recognition funds this month.

How to choose northbound mutual recognition funds?

With the introduction of more fund sales institutions, how to choose suitable northbound mutual recognition funds for global asset allocation is also a problem faced by investors.

Zhang Xin mentioned that, unlike QDII funds, mutual recognition funds offer more diversified currency share types and exchange rate hedging share types. For domestic investors investing in overseas bonds, mutual recognition funds have more options in terms of optional share types compared to QDII funds.

In He Zhe's view, mutual recognition funds generally have multiple currency shares such as RMB, USD, HKD, AUD, hedged and non-hedged shares, accumulation and dividend shares and other different share types.

"In the short term, due to the strong market expectations for exchange rates and U.S. Treasury bonds, in simple terms, the U.S. dollar exchange rate and U.S. Treasury yields have fallen significantly at the same time." He believes that it is too early to conclude that the U.S. economy is in a rapid recession. There is a high probability that U.S. Treasury yields and the U.S. dollar exchange rate will recover in the future. If the exchange rate exposure is fully hedged at this time, there is a high probability that further losses will be suffered in capital interest rate differentials. Therefore, the non-hedged RMB share may still be a better choice in the short term.