Harvest Fund focuses on ideas that deliver sustainable returns to investors
As a pioneer in the Chinese asset management industry with a 20-year history, Harvest Fund is focusing on “ideas” to create sustainable returns for investors, states company chairman Zhao Xue
- It pioneered the “all-weather, multi-strategy” investment research model in the industry
- Aims to become a more integrated financial services provider
- Has integrated environmental, social and governance into the company’s investment philosophy
Harvest Fund Management Company (Harvest Fund) is a pioneer in the Chinese investment management industry that has grown into a “full-licence and service” asset and fund manager, providing products and solutions covering mutual funds, institutional investments, pension funds, as well as overseas investment and wealth management.
It provides professional and efficient investment services for over 95 million investors and is ranked among the top providers. Harvest has led the industry over the last decade, with total asset under management (AUM) of $142.3 billion (RMB 1 trillion) by end of 2018.
Harvest Fund positions its pension business as a long-term strategic business, and is deeply involved in the three major pension fund businesses including the National Social Security Fund, Enterprise Annuity, and Basic Endowment Insurance Fund. The scale of Harvest Social Insurance continues to rank among the largest in the country.
Established in March 1999, Harvest Fund is one of the earliest fund management companies to operate in China. In the past 20 years, it has adhered to the principle of delivering “consistent and stable” investment performance in the midst of uncertain and volatile market conditions.
In the face of an investment industry in transition, buffeted by changes in regulation, technology and customer needs, Zhao Xuejun, chairman of Harvest Fund, believes that “ideas” remain at the heart of long-term sustainable performance. He emphasised that research is the wellspring for such ideas, especially in understanding market conditions and investor behaviour.
“Active management and in-depth research are the two most effective means of dealing with inefficient markets. In the past 20 years, based on the deep understanding of market development and customer demand, Harvest Fund has been continuously planning, investing in and upgrading the investment research system,” he explained.
Zhao Xuejun, Chairman of Harvest Fund
Harvest Fund strengthened its investing and research system
Harvest Fund has two core pillars of “active management” and “deep research”. It pioneered the “all-weather, multi-strategy” investment research model in the industry, supported by a strong investment research team of more than 300 people, nearly 150 public funds and a rich product line comprising hundreds of investment portfolios.
The “all weather, multi-strategy” investment platform in 2009 has continuously upgraded the research system, which consists of more than 25 research groups. It carries out comprehensive research covering categories such as asset allocation, strategy, industry, individual stock, fixed returns and quantitative research, continuously bringing positive return to investors accordingly, with a strong investment team managing over 140 mutual funds.
The investment research system was developed through many years in different phases, starting with Harvest 1.0, which emphasised the understanding and research of the market through professional investment researchers. In the second phase, Harvest Fund introduced its new “all-weather, multi-strategies” investment research model towards the end of 2008 and early 2009. It was more in line with the needs of customers at that time for multiple strategies. Therefore, when the demand for investment in the asset management of institutional customers increased in 2012 and 2013, Harvest Fund was able to meet the needs of institutional customers as well.
At present, the research system has been upgraded to the “all-weather, multi-strategy” version 3.0, emphasising the transition from “individual” to “logic”, further consolidating and transforming individualised investment experience and knowledge into collective “logic”.
There is still room in the Chinese market for actively managed investments to create excess returns. Fund managers’ Alpha (excess returns above benchmark) capability is still the main source of income for investments. This is also based on Harvest Fund’s actively managed and deep fundamental research -driven investment.
Super ETF - Super smart index investment
“In June of this year, Harvest Fund launched the Super ETF (exchange traded fund) brand, whose biggest feature is that it is no longer driven by traditional factors, but all driven by ideas,” Zhao revealed.
He elaborated, “At the same time, we realise that in the world of investment, we do not work on just a single strategy. In the face of complex capital markets, a single idea cannot satisfy the diversification requirements of customers. Therefore, what we are constantly trying to do is to bring together all kinds of ideas. For example, value investment, fundamental value, “economic moat” theory, “growth at a reasonable price” investment, can all be the foundation of Harvest Fund Super ETFs. Harvest Fund is transforming and “industrialising” investment research by absorbing more effective ideas into the system. We firmly believe that our product manufacturing capabilities supported by strategic investment research will be more responsive to customer requirements for sustainable performance.”
Zhao believes that in China’s current inefficient or less efficient financial market, the efficient frontier is no longer an index with market value as the weight, and there is a need to constantly consider the correct basis for better portfolio allocation.
Harvest Fund has carried out deep research on the long-term alpha and beta in the Chinese and US markets. It found out that the long-term beta in the US stock market is greater than that in China; the overall return is higher with less volatility. The US stock market is highly effective thus alpha is difficult to get there.
"Our research results showed that if we follow the US formula and use market value-weighted index to do asset allocation, then we are unable to get enough alpha. As a result, unlike in the effective US stock market, smart beta is a better tool than traditional ETF for asset allocation in the China market,” said Zhao.
He also emphasised that traditional smart beta is guided by Western investment philosophy, concepts and construction, which makes it more factor-driven, but Harvest Fund’s smart beta is entirely driven by ideas. This means all the methodology for investment is based on cognitive logics, like Warren Buffett’s “Value Investing” and “Growth Investing”.
According to the financial site Investopedia, smart beta investing combines the benefits of passive investing and the advantages of active investing strategies. The goal of smart beta is to obtain alpha, lower the risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio.
Returns of overseas smart beta funds can be usually broken into different factors, such as market value, dividends, volatility, but those are the traditional factors based on an efficient market. In a less-efficient market, especially in China, asset and fund managers have to combine these factors to form new ones, or find others. The right factors may be derived from a logical analysis of the important criteria for gaining excess returns in the selected market.
Harvest Fund’s Super ETF is driven by the same ideas in smart beta. Super ETF may provide a performance edge to Chinese asset managers and investors when it is systematised.
There are two challenges for super ETF, the first one is how to gain alpha in traditional broad-based index funds; the second one is how to allocate both alpha and beta in an ETF product.
Jing Lei, general manager of Harvest Fund believes that Super ETF has a unique competitiveness. “Traditional index investment is stable and offers lower costs, and higher liquidity, but it can only provide average return, without much excess returns (alpha),” he stated.
Harvest Fund’s Super ETF has several advantages: “Low costs; high liquidity; versatility and multi-strategic; transparent index compilation; standardised products which are easy to apply in asset allocation; offering long-term sustainable returns,” Lei added.
Future focus on digitalisation and internationalisation
According to Zhao, the first and most important focus for the future is on digitalisation. In the future, there will be a high degree of digitisation efforts in Harvest Fund.
He shared: “The important point of Harvest is that it is a future-oriented company. It means that the entire financial industry and the whole society are advancing. From the industrial revolution to the information revolution, and to the digital age, it is moving towards the digital age. Harvest Fund is also undergoing digital evolution. How to establish an asset management system for the digital age from traditional asset management is a direction we are working hard on. How to invest in the digital age, how to serve customers in the digital age. How to improve operational efficiency and reduce operating costs in the digital age.”
In this regard, Zhao feels that Harvest Fund has to become a more integrated financial services provider and to leverage digitalisation to become a platform that connect its customers to an integrated suite of products and services. “So that the financial needs of customers can be fully satisfied within Harvest Fund,” he said.
The second important focus is on internationalisation. Zhao commented that Harvest Fund must be an international organisation, not merely a local one. “Ten years from now, I hope that everyone will feel and say that our brand is international, not just in China. Internationalisation is a very important strategy for us,” he emphasised.
With the steady growth of the company, Harvest Fund has successfully expanded into international markets. It has established business centres in Hong Kong, London and New York as part of a global strategy implementation.
In 2008, it established its Hong Kong subsidiary, Harvest Global Investments, which has maintained its leading position in the Chinese asset management institutions in Hong Kong for several years. It has established subsidiaries in New York and London in 2013 and 2015 respectively, becoming the first to enter the European and American markets and establish institutions. Harvest Global Investments has a research team of over 30 people in Hong Kong and is one of the largest investment research teams of Chinese fund companies overseas.
Driving ESG integration
In line with the increasing level of industry awareness and initiative around Environmental, Social and Governance (ESG) integration, Harvest Fund has also started to embed ESG related factors into its investment philosophy.
Based on the result of the 2019 Independent Research in Responsible Investment survey that involved over 1,100 industry professionals from 43 countries, Harvest Fund was ranked in the global top 50 firms in terms of “Asset Manager Contribution” to sustainable and responsible investment.
In June 2018, Harvest Fund signed onto the United Nations’ Principles for Responsible Investment (PRI), thus becoming one of the first Chinese asset managers to commit to sustainable investment.
PRI is intended to help investors understand the impact of ESG issues on investment and encourage its signatories to incorporate those issues into their investment and decision-making process.
At the signing of the principles, Zhao commented: “The Chinese asset management industry has entered into a new stage of development, and responsible investment has become an inevitable trend in China. As a leading asset manager in China with a long-term vision, it is our responsibility to play a positive role in the sustainable development of capital markets, and to help promote quality growth for the economy. We also believe responsible investment is essential to achieve long-term returns and reduce tail risks for our clients.”
Becoming an official PRI signatory is a significant proof to Harvest Fund’s commitment to sustainable investment. Thomas Kwan, Chief Investment Officer of Harvest Global Investments leads the company’s strategic initiative on responsible investing. Kwan has already started building an ESG team with specialists based in both Beijing and Hong Kong. Harvest Fund aims to implement a formal and comprehensive ESG process across all major asset classes, and also incorporate ESG analysis in the research and investment decision-making process.
Kwan believes that ESG can offer a more holistic and forward-looking view of a company’s long-term prospects and sustainability. Thus, by integrating material ESG factors, investment managers can handle ESG risks and opportunities and generate better risk-adjusted returns in the long term.
“We believe the foundation of a successful ESG integration is in-depth understanding of ESG factors in investment and how they materialise in different time horizons. This requires us to develop understanding of the industrial competitiveness, corporate strategy, governance, and their capability to manage long-term intangible ESG risks and opportunities. Hence, we emphasise fundamental ESG analysis and have brought in experienced ESG specialists to work with investment analysts and portfolio managers to decipher financially material ESG risk and opportunity factors,” he remarked.
Taking environmental, social, and governance considerations into account in investment is not new to China’s asset management industry, though the term ESG integration is. Large institutional investors like Harvest Fund do consider some ESG factors in investment to some extent and on an ad-hoc basis. However, systematic and holistic ESG integration into investment processes is still rare in China. Kwan believes that China’s institutional investors need to integrate ESG factors systematically throughout the investment processes, in particular, formulating a holistic ESG research framework with local granularity to better capture risks and opportunities.
Harvest Fund has developed a proprietary ESG research framework, which emphasises on profiling the governance structures and performance of all companies, but also includes material environmental and social opportunities and risks based on industry characteristics and investment relevance. By utilising both external and internal ESG data, it profiles material ESG risks and opportunities of companies in its investment universe, which investment analysts and managers refer to when making judgement on how these risks and opportunities may materialise in different time frames.
Risk monitoring is another feature in its ESG investment process. Besides ESG portfolio reporting, ESG-related controversies are also flagged in a timely manner for PMs to manage event risks. It is also working with its postdoctoral research station to develop internal artificial intelligence (AI), more specifically text mining capabilities, to actively monitor ESG events and risks. It aims to integrate the output of this project into the investment processes over time.
ESG integration is carried out across different asset classes at Harvest Fund, mainly equity and fixed income. But the approach in integrating ESG factors in equity and fixed income varies. For example, due to the downside risk protection feature of credit analysis, governance is rather dominant compared to other ESG factors and sometimes has veto power in determining the investability of bonds. For equity, the relative materiality of E/S/G issues varies by sector and sometimes by business growth cycle. So the equity analysts or portfolio managers may weigh less on governance for a particular industry or company than on their environmental and social aspects. The different investment time frame between equity and credit investment also may result in different levels of materiality of ESG factors.
Though ESG assessment framework for credit and equity is largely the same, in particular for listed entities, some adaptations for credit are further required. For example, the credit governance framework is slightly modified to address a focus on ownership, transparency, and management quality. Credit ESG analysis is more challenging for small issuers due to lack of disclosure, but its qualitative analysis addresses these challenges in its framework.
In order to accelerate the growth in ESG integration in China, Kwan opines that the promotion of responsible investment by large asset owners in China is essential. With substantial power in the asset management industry in China, these big names are expected to take a leading role and pass the requirements down to asset managers. Clearer and implementable guidance from regulators are also necessary.
Keywords: Investment Management, Asset Management, Fund Manager, Wealth Management, Technology, Investment Research, Esg, Sustainable Investment
Institution: Harvest Fund Management Company, National Social Security Fund, Enterprise Annuity, Basic Endowment Insurance Fund
Guest: Zhao Xuejun, Jing Lei, Thomas Kwan