– When and how did the idea come about?
Bernardo Alves – The idea started in 2008, when I came back from university, but it was complicated. There was no company, no track record, and it was delayed until 2016, when we went to Hong Kong to talk to the Bank of China.
– Eight years of maturation?
B.A. – In the meantime we made investments in Portugal, in IT and F&B. It was a learning process, at the same time as refining distribution and capital allocation strategies. It took time to mature. When the Bank of China showed interest in having a company in Macau that would talk directly to investors, the idea took off. We then tried to create a fund, but we didn’t succeed; in 2018 another opportunity arose, with Hong Kong Asset Management, from the Bank of China, and we launched the Greater Bay Area Fund. In the meantime, Covid appeared…
– Investment downturn?
B.A. – Exactly. But here the problem with funds has been going on for some time. Since the Portuguese administration, traditional banks haven’t invested in innovating their own funds – I don’t think they had the capacity and know-how. That’s why Hong Kong has so much power in Macau, in terms of currency and investment; with a fast track at the AMCM (Monetary Authority of Macau), which approves what has been approved by the SFC (Securities & Futures Commission of Hong Kong). After Covid, I then spoke to the AMCM about creating this fund in patacas and a management company – unheard of at the time.
– Why in patacas?
B.A. – There are several factors; perhaps the main one is that a large part of the population earns their income in patacas and bears the gateway tax for investments and purchases in other currencies. We did a market study and there wasn’t much on offer, but in patacas there was this gap that we could fill and differentiate the company. We put two points together: the market needs this, and I can survive with a company without a name to compete with BlackRock, Vanguard, or J.P. Morgan? that was the way to go. On the other hand, as we operate in the ‘money market fund’ – treasury funds – our investment is made through the capital that is invested in banks in the short term. We vary, making decisions by the day, we have to be dynamic. To access international markets, the pataca has to be exchanged for another currency; what we take away is the risk or the client’s inability to do it themselves.
Do you only invest in currencies and banking products?
B.A. – The management regulations, approved by the AMCM, say exactly what we can invest in. At the moment, in US Treasury bonds and deposits in Macau banks. We can shorten the margin between the interbank market and interest rates in retail banking.
– Do you pool amounts to negotiate better and get closer to interbank rates?
B.A. – The aim of a fund management company has always been to set up collective investment schemes. We were the first in Macau, so it took longer to get approval. We raised capital in order to be able to negotiate higher interest rates; always with the idea that collective investment undertakings have to be careful about return and liquidity. Our fund, like any mutual fund, can be liquidated in two or three days.
– Low risk?
B.A. – The financial instrument itself guarantees this.
– How do states and Macau’s own strategic reserve do it?
B.A. – In the secondary market for financial instruments we operate at the most basic level; just above the risk of a deposit – if the bank fails. Public debt securities are already included in credit ratings, high yields and junk bonds… with different returns and risks. We try to have a lower risk.
– What is the average return you offer?
B.A. – When we last heard from the AMCM, the interest rate composite in Macau was at two and a bit. When our fund was launched, we got four and a half. There’s always a big margin because Macau has excess liquidity and banks generally offer low rates. We’re really competitive. Our other big competitor, I would say, is the banks’ structured products; derivatives that invest with interest rates in another currency – more risky than ours. In the second or third tier we have public debt securities and bond markets; with higher rates than ours, more risk and less liquidity.
– How is investment attraction going?
B.A. – We launched the fund in July this year and raised 80 million patacas in the IPO (initial public offering). We then started allocating capital and today, if I’m not mistaken, we have 200 million. We have to keep going up. Normally, a fund would have to raise more than 300 million to achieve the best rates of return. But in Macau we have a different infrastructure, a different economic reality…
Is 200 million enough?
B.A. – In Macau, the fund can survive on 100 million. We wrote in AMCM’s regulations that it would be 200 million; but it’s a learning curve and, from the outset, AMCM realized that, as the first company to take this step, we couldn’t know everything.
– How far do you think you can go?
B.A. – In Macau we have almost 500 billion in deposits. If you think about 500 million… that would be one percent of the total. But in this paradigm of low financial literacy, the level of learning we’re at, and the type of funds that can be invested, at this stage 200 million is the starting point. In terms of market share, a billion is possible. Just as a distributor? I don’t know; we have to test it. There is no infrastructure in Macau that, with funds, has several distributors. We’re working with the Bank of China, and there are other potential banks, but it will take time.
– What is the minimum investment, and how can you invest in this fund?
B.A. – At the moment, through the Bank of China app, or in person at the counter. Our minimum is 5,000 patacas.
– Is there an upper limit?
B.A. – No, but there is a potential limit in mind, so that on the day the client redeems, it doesn’t affect the other units. It hasn’t happened to us yet, but as with everything, there’s always a first time. If there is a redemption of more than 10 percent of the fund’s value, the AMCM gives us the right to freeze the fund until a proper liquidation is achieved. Obviously, we don’t want to do that; it would only be in the worst-case scenario.
– Are you only thinking of consolidating this fund, or diversifying into different investment profiles?
B.A. – It’s been a huge learning curve; not only for the regulator, but also for our distributor and custodian, and for ourselves, to understand how to build the fund and regulate it. Most importantly, knowing what the investor is looking for. We don’t have a big team, and it’s difficult to sell funds in Macau; but I hope one day to sell funds directly to clients. It will take more infrastructure and investment, but the future goal is to be closer to customers; only with deposits and investments. The Money Market Fund was set up to test the market and then become a kind of narrow bank. But the regional part remains to be tested. Wealth Management Connect allows investors in the Greater Bay Area to access funds from Macau and Hong Kong; which already has an annual quota of close to 150 billion Hong Kong dollars. Macau has nothing. If all goes well, next year we can work with local banks and see how we can access that market. Still in the current profile, we want to expand our fundraising activities; the second step is the Greater Bay Area.
– 80 million people, instead of 600,000…
B.A. – Totally different! But I think it’s important that the SAR, as part of China, tests its own currency; I find it strange that we haven’t focused on this privilege. I hope the pataca can attract more investment and create financial instruments. It all starts with this ‘big bang’; this fund that alerts the industry to new ways of investing, new vehicles and new ways of creating wealth for people. That’s where we have to bet.
– Are Portuguese-speaking countries potential markets?
B.A. – It’s more difficult; after all, I don’t know yet… I know it’s another game, let’s say in the Champions League; and we’re still in the second division. First, we need to win over Macau’s major arteries and local trust, then we can test the value of the pataca on the regional market. In Portuguese-speaking countries, we’ll only know by testing, but the risk of failure is great. When I said I wanted a fund in patacas, everyone laughed; they said it was impossible. It all depends on what we can convey to outside investors, because the aim is also to build a financial system in Macau and bring in capital, for example, from Portugal. It also has to do with the Basic Law, the law on funds; and how to protect and capture that capital. Compared to Europe, the tax on capital here is zero, so we have to structure the product, do market research and figure out how to work with banks in Portugal.
– Does Macau shy away from promoting tax advantages?
B.A. – Let’s be honest: we have to think about it; I don’t think it’s an advantage we can’t use. There is also a certain nostalgia in Portugal, and we can work on that. We have to work on Macau’s image abroad, and the AMCM has to help with that. I just attended the conference to which central banks from Portuguese-speaking countries came, and you can see the AMCM’s desire to shorten distances. The new law on funds will capture this ideology and allow for new financial instruments and vehicles, because at the moment we only have public funds. We want to invest in private funds, but the law needs to be more comprehensive.
What information do you have on this?
B.A. – The last two decades have seen the creation of new financial vehicles and instruments, investments… with different regulation and monitoring – and more secrecy. The AMCM was able to see this. Since the construction of the MSAR, we have set up the new financial system law, the fiduciary law, the leasing law; now comes the new funds law… three or four factors that should diversify the economy. But there’s a big difficulty: in Europe we have the invisible hand, and in China there’s probably a more visible hand; but in Macau, if the private sector doesn’t do it, the traditional banks find it difficult to create something different. I don’t know what kind of hand there is in Macau to push these new industries; I know that the biggest risk is uncertainty. When we set up the company, there was the uncertainty of whether we would succeed; then there was the uncertainty of whether the AMCM would approve funds of this kind. The uncertainty is too high for companies like ours to bring these people to Macau. We’ve had countless meetings with people who wanted to know how we did it; how to make partnerships… not only Chinese state-owned companies, but also from Europe, to figure out how to unblock this process. This is the problem. The rules of the game, through the law, should allow new vehicles for attracting capital. This is something I’m going to try to work on, but right now the focus is on public funds and then private ones. That’s what the law gives me and that’s my know-how.
