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Hong Kong retail investors, pensioners to feel the pinch as Tracker Fund falls in line with US sanctions and out of sync with Hang Seng Index

South China Morning Post logo South China Morning Post 11/01/2021 Enoch Yiuenoch.yiu@scmp.com
The US$13.6 billion Tracker Fund, Hong Kong’s largest exchange-traded fund, will stop adding new investments in sanctioned stocks to comply with a US executive order. Photo: AFP The US$13.6 billion Tracker Fund, Hong Kong’s largest exchange-traded fund, will stop adding new investments in sanctioned stocks to comply with a US executive order. Photo: AFP

US sanctions against certain mainland Chinese companies might hurt millions of retail investors and pensioners in Hong Kong after Tracker Fund, the city's biggest and most popular exchange-traded index fund, said on Monday that it will not add new purchases in these firms to its portfolio.

While the fund was set up in Hong Kong 21 years ago, it is managed by State Street Global Advisors Asia, a unit of the Boston-based company, and must follow United States regulations. Its investment portfolio amounts to HK$105.3 billion (US$13.6 billion).

"The consequence of the Tracker Fund's decision means it will no longer perform in line with the Hang Seng Index," said Stewart Aldcroft, chairman of Hong Kong pension company Cititrust. "This will not be liked by some investors. In addition, US investors, including hedge funds, pension funds and others will be required to disinfect from Tracker Fund under the new US order."

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Tracker Fund is popular because it is simple to trade, it is cheap and because it tracks the Hang Seng Index. The more than 184,000 Hong Kong retail investors that bought the fund at HK$11.5 per share at its initial public offering in 1999 will have more than doubled their money as of Monday, when the fund closed at HK$28.12. Moreover, the city's 12 Mandatory Provident Fund investment funds use Tracker Fund to make investment decisions, making it the most widely held investment by Hongkongers.

"Tracker Fund may not be able to continue to have the same strong performance as the Hang Seng Index because of the sanctions," said Gordon Tsui, the chairman of industry body Hong Kong Securities Association. "It is possible some investors may call for a change in the manager to a non-US company, so as to escape the sanction requirements."

The decision by State Street came after several Wall Street investment banks - Goldman Sachs, Morgan Stanley and JPMorgan - decided on Sunday to also delist 484 warrants and other derivative products tied to China Mobile, China Unicom and China Telecom, three of the Chinese entities targeted by President Donald Trump's November 12 executive order, from the Hong Kong stock exchange.

Tracker Fund owns a HK$2.4 billion stake in China Mobile and HK$253 million worth of shares in China Unicom, according to the latest holdings published on its website. The two Chinese telecoms giants command a combined 3.45 per cent weighting on the Hang Seng Index, a gauge created by compiler Hang Seng Indexes Company, which is a unit of Hang Seng Bank. It does not own any China Telecom stock, which is not a benchmark constituent.

The New York Stock Exchange had earlier decided to remove the American depositary shares issued by these telecoms companies, citing the order banning American investors from owning or trading in the stocks allegedly owned or controlled by the Chinese military. Index compilers also removed the trio from their global benchmarks on Friday, triggering a sell-off that erased HK$59.2 billion in market value at the three companies.

Tracker Fund still popular years after Hong Kong created ETF to dispose of shares bought during 1998 crisis

China has vowed to retaliate against measures it deemed as unjustified extraterritorial attacks on local companies. The government unveiled a new measure, known as "Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures", to block persons or companies from complying with such sanctions.

The Tracker Fund was created in November 1999 to dispose of the government's equity holdings built up through market intervention during the Asian financial crisis in 1998 to arrest the slump. The fund lost 3.5 per cent in 2020 and gained 12.7 per cent in 2019, including reinvested dividends, according to its website. Its top three holdings are AIA Group (HK$11.2 billion), Tencent Holdings (HK$9.94 billion) and HSBC (HK$8.4 billion).

On Monday, Hang Seng Bank slipped 1.1 per cent to HK$145.9 while its parent, HSBC, retreated 0.9 per cent to HK$43 in local trading. Tracker Fund, or TraHK, added 0.4 per cent to HK$28.12.

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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.

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