Hong Kong regulators are reviewing the appointment of the manager of the city’s Tracker Fund to make sure local investors’ interests are well protected against any negative effects from a US blacklisting of Chinese stocks held in its portfolio, according to two people familiar with the matter.
As part of the review, the regulators will study whether to switch to a manager without US ties to avoid any implications from sanctions, or at least require the manager to assert it would not follow US sanctions if they disenfranchise Hong Kong investors, said the people, who were not authorised to discuss the matter publicly.
“The US sanctions against Chinese stocks have not ended with the change in president of the [United States],” one of the people said, referring to the Tracker Fund review. “We have to prepare for such a policy remaining in place for the long term.”
Even if the review may not necessarily result in the Hong Kong arm of Boston-based State Street Global Advisors losing its mandate to run the largest exchange-traded fund (ETF) in the city, it could change how a manager for the fund is chosen and governed in the future. For example, the current contract to manage the fund does not have an expiration date and one could be added as part of the review, one of the people said.
The purpose of the review is to ensure the manager of the Tracker Fund, which mirrors the benchmark Hang Seng Index, maintains Hong Kong investors as its top priority, since the fund is widely held by pensioners and other local investors, the people said.
A State Street spokeswoman declined to comment on the review.
On Thursday, the Tracker Fund, also known as TraHK, said it would bar Americans from owning the fund after a first warning in January that the fund was no longer appropriate for US investors. It also said it was not registered in the US and had no intention to register as a US investment fund, according to an addition to its prospectus.
“As previously communicated in January 2021, TraHK is not appropriate for US persons to invest in,” the State Street spokeswoman said. “The accompanying unit holder notice reminds TraHK’s investors that if they are US persons, US law may prevent them from disposing of or otherwise dealing in their units after June 3, 2022, although they may still receive dividends.”
A “very small percentage” of the fund is directly held by US persons, she added.
Established in November 1999, the Tracker Fund was first set up by the Hong Kong Monetary Authority (HKMA) to dispose of the city government’s equity holdings accumulated in a two-week, HK$118 billion (US$15.2 billion) intervention to prop up stock prices during the 1998 Asian financial crisis.
The fund, with HK$90 billion of assets under management, is popular with retail investors and many of the 4.5 million members of the Mandatory Provident Fund (MPF), the city’s retirement scheme. Twelve MPF funds offer the Tracker Fund as an investment choice.
Thursday’s change in the Tracker Fund’s prospectus comes after the Biden administration in June expanded a ban on Americans from investing in Chinese companies that purportedly have ties with the Chinese military.
The June 3 executive order by US President Joe Biden bars American investors from buying securities of 59 blacklisted companies beginning Monday and gives them a year to exit their existing investments. It replaces a separate executive order in November 2020 by then-US President Donald Trump.
US President Joe Biden has barred Americans from investing in nearly six dozen Chinese companies over purported ties with the Chinese military. Photo: Reuters
China foreign ministry spokesman Wang Wenbin said at the time that the US had “abused its national power to suppress and restrict Chinese companies”, referring to the Biden executive order.
Former HKMA chief executive Joseph Yam warned that the Tracker Fund’s manager would be ‘no longer fit for duty’ if it failed to track stocks on the Hang Seng Index. Photo: KY Cheng
State Street Global Advisors Asia, which has managed the fund since 1999, came under fire in January when it said that the Tracker Fund would be barred from owning sanctioned firms as part of Trump’s investment ban. It made a dramatic U-turn three days later, saying it would not adhere to the US sanctions after local heavyweights slammed it.
“The whole purpose of the Tracker Fund is to track the Hang Seng Index. If the manager cannot track the index, then the manager is no longer fit for duty,” Joseph Yam Chi-kwong, the HKMA’s former chief executive and the creator of the Tracker Fund, told the South China Morning Post in January.
There is no expiry date for State Street’s mandate, but there is a procedure to remove it as manager. A six-member supervisory committee, whose chairman George Hongchoy is appointed by the HKMA, can replace the manager “for good and sufficient reason” where the change “is desirable in the interests of unit holders”. The manager may also be removed if more than 50 per cent of Tracker Fund unit holders vote for its removal.