Morningstar Asia Limited, a subsidiary of independent investment research firm Morningstar, Inc. (NASDAQ: MORN), has published a research report, “Change is Afoot in China,” which examines changes in the Chinese equity market and the indices and exchange-traded funds (ETFs) that track the market. Authored by Morningstar’s global manager research team, the report investigates:
How index providers are changing the way they ”define” China;
How some of these definitional changes may affect investors;
Factors investors should be mindful of when evaluating Chinese equity ETFs; and
How benchmark changes might affect investors in Chinese equity ETFs.
“Change is afoot in a number of respects from economics to demographics to the very definition of ‘China’ and investors need to be prepared as they consider an investment in Chinese equity ETFs,” Jackie Choy, ETF Strategist for Morningstar Investment Managament Asia, said. “Our research report can help investors navigate these changes and make better informed investment decisions.”
Key highlights of the research report include:
Major index providers, including MSCI, FTSE Russell, and Standard & Poor’s, are considering adding China A-Shares, which are companies listed onshore either on the Shanghai or Shenzhen stock exchanges, to their global benchmarks. MSCI announced that it will include overseas-listed companies such as Alibaba and Baidu in the MSCI China Index in November 2015. Major index providers are creating new indices that include A-Shares to serve as the basis of index-tracking ETFs and mutual funds. All these indexes could be used by active fund managers as new benchmarks for existing and/or new funds that better reflect their rapidly evolving opportunity set.
The inclusion of China A-Shares in emerging markets and global benchmarks will likely alter the risk/return profile of the indexes, while also conferring some diversification benefit given the low historical correlation of Chinese equities to other types of stocks.
The costs stemming from these changes; premiums and discounts within the relevant ETFs; and the nuances of benchmark construction can affect investor ultimate outcomes. For example, the dispersion of premium/discount levels for Renminbi Qualified Foreign Institutional Investor (RQFII) ETFs and the synthetic Chinese A-Shares ETFs in Hong Kong were much wider than that of the offshore Chinese equity ETFs traded in Hong Kong.
Morningstar also recently published, “China Opens ’A’ Door for Foreign Investors,” which provides background on China A-Shares and the general characteristics of this market, evaluates the risks of investing in China A-Shares, and discusses the A-Share inclusion plans of index providers and the largest index funds. To access a copy of the report, please click here.
Morningstar has approximately 105 manager research analysts worldwide who cover approximately 4,000 funds and ETFs. The company also provides data on approximately 190,000 open-end mutual funds, 11,600 exchange-traded product listings, and 9,500 closed-end funds as of June 30, 2015.
About Morningstar Asia Limited and Morningstar, Inc. Morningstar Asia Limited is a subsidiary of Morningstar, Inc., a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than U.S.$180 billion in assets under advisement and management as of 30 June 2015. The company has operations in 27 countries.
Morningstar expanded to Asia in April 2000 and has grown its businesses into Japan, Korea, India, mainland China, Taiwan, Singapore, and Hong Kong. The Asia operations not only offer timely information on mutual funds, but also insightful and independent analyses, unbiased fund ratings, and sophisticated analytical tools to help both individual and professional investors make better investment decisions.