TraHK U-Turns on U.S. Executive Order Backwash: Impact Analysis

Portfolio movements

• On Jan. 11, TraHK reduced the impacted securities in the same proportion as their weights in the Hang Seng Index.
• On Jan. 12, the fund did not add impacted securities despite the addition of the overall portfolio, resulting in a slight underweight position (0.02 percentage points) when compared to the benchmark.
• On Jan. 13, the fund did not reduce the impacted securities despite the reduction of the overall portfolio. Lack of action resulted in a slight overweight of the impacted securities (0.09 percentage points) as compared to the Hang Seng Index.
• On Jan 14, the fund reduced the impacted securities at a higher proportion than the reduction of the overall portfolio, bringing their weights in-line with those in the index at the end of day.

Share price movements

• The share prices (day-end) of China Mobile (00941) and China Unicom (00762) climbed on Jan. 11 by 5.8% and 5.7%, respectively, and continued the positive momentum on Jan. 12, gaining 6.6% and 6.0%, respectively. Their share prices slipped by 0.4 and 1.8%, respectively, on Jan. 13, putting their total gain over those 3 days at around 11%. The performance of the unimpacted securities rose by around 1% for the 3 days.
• The absolute performance differential of the impacted and unimpacted securities over the 3 days was around 10 percentage points.

Inflows and outflows

• We estimated outflows of HK$2,415 million (US$311 million) on Jan. 11, inflows of HK$313 million (US$40 million) on Jan. 12 and outflows of HK$3,097 million (US$400 million) on Jan. 13.
• During the 3 days, we estimate a net outflow of HK$5.2 billion (US$670 million), representing 4.94% of TraHK's asset under management as of Jan. 8.

Tracking Performance

• The daily tracking differences for TraHK from Jan. 11 through Jan. 13, 2021, including other effects from normal index-tracking operations (e.g. fees, cash drag, etc.), landed between  0.10 and 0.30 bps each day (meaning the fund’s performance lagged the index’s performance), for a combined effect of 0.51 bps (42 bps on an annualized basis).
• While these figures were on the high side if extrapolated to an annualized figure (especially when compared to its ongoing charge of 10bps), a 0.30 bps daily tracking difference is well within one standard deviation of the tracking differences in the past two calendar years.
• TraHK resumed transactions in the impacted securities on Jan. 14, 2021, limiting tracking difference/error concerns to the 3 days. While the impact was small and driven by relatively large variables (10% outperformance of the impacted securities along with a 5% change in asset size), it would have been ideal for an index fund to fully replicate an index in order to minimize tracking differences/errors.

Recall that Blackrock/iShares HK announced on Jan. 8 that two Hong Kong-domiciled ETFs would no longer make new investments of the impact securities in their funds from Jan. 11. And BlackRock/iShares did not make any subsequent announcement to revert the decision. That suggests U.S.-based asset managers have different interpretations about how their non-U.S. affiliates should conform to the Executive Order.

The U.S. swore-in a new president on Jan. 20. Investors should continue to take note and assess the impact on any changes relating to the Executive Order.