KraneShares: ETFs Open Door To China


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KraneShares, the new ETF firm focused exclusively on China, thinks it can muscle its way into U.S. investors' consciousness in the coming years. Brendan Ahern, the New York-based executive spearheading the company's U.S. marketing efforts, stressed that the firm's physical presence in China gives it a unique perspective on communicating the Chinese story.

It has seven ETFs in registration at the SEC, including a few that look quite interesting:a "dim sum" bond fund that will own bonds with all kinds of ratings; and an equities fund that's organized around China's much-talked-about "Five-Year Plan"-the latter a quirky product that's akin to putting a capitalist wrapper around one of the lasting vestiges of Chinese socialism.

Ahern, given regulatory constraints, wasn't able to shed much light on the outlook for the upcoming products when he spoke recently with Managing Editor Olly Ludwig, but this much is clear:Investors won't have to wait too much longer. Judging by the prospectus, the KraneShares CSI China Five Year Plan ETF should be live by early July. Paint the picture in broad brush strokes of what KraneShares is all about, because it seems a bit audacious that you think you can muscle into the world of big ETFs like the iShares FTSE China 25 Index Fund (NYSEArca:FXI) and the SPDR S&P China ETF (NYSEArca:GXC).

Ahern: Our mission and vision is that we are a company that believes in China. We're looking to promote the Chinese economy, capital markets, companies and their goals to U.S. investors. Secondarily, we're focused on delivering Chinese investment opportunities to U.S. investors. And lastly, we're very much focused on educating the U.S. investor, not only about just the capital markets, but really about China and its great, robust culture, the people and the history. Let's talk asset classes for a minute. You've filed mostly for equity funds and one bond fund. How wide of a net are you going to be casting here? Would you go into commodities and try to focus on futures listed on different exchanges than what we've seen so far in the ETF industry? How do you differentiate yourself?

Ahern: I think a big aspect is including the voice of the client in everything we do, and that we see demand for China that can be both direct and indirect, as well as the potential for multi-asset-class exposure. One of the funds that caught our eye here at IndexUniverse in your filings so far was the "Five Year Plan" ETF. What is it about the Five-Year Plan that's compelling? Why should we care about it?

Ahern: I don't think I can answer that-we really can't touch on anything in and around the filings. Fair enough. And if I ask you if that Five Year Plan ETF should be thought of as a sector play or a broad China play for core holdings, you might not be able to answer that either?

Ahern: That's right. I can't talk about that either. Let's pull back for a little more 30,000-foot perspective:Talk for a moment about your founder and CEO. Where did he get the audacity to carry this off?

Ahern: Our founder, Jon A. Krane, actually lived in China for a number of years. I think for anybody who travels to China, you see the tremendous growth that's taking place and the strong desire of the people to grow their nation and their economy. It becomes infectious. After he returned to the U.S., he wanted to bring that opportunity set to U.S. investors. That led to the establishment of KraneShares. You're not the first:There's iShares with FXI; Guggenheim with its AlphaShares indexes designed by Burton Malkiel; and GXC from State Street, perhaps one of the most inviting securities covering that space. So how do you make the case? Yes, your boss has this great perspective on China. But why should investors listen to him when there are already all these other products out there?

Ahern: Remember, we do have an office in Beijing. A lot of what's spoken about China is coming from people based in the U.S. Several weekends ago, Barron's had a big article on emerging markets, and all of the ways to play that were from U.S. firms.

We, on the other hand, like the idea of bringing that local voice, those boots on the ground, taking what they're seeing and translating that into products for U.S. investors. So we just think we have a very different orientation. We're certainly leveraging our Beijing office and the relationships we have on the mainland. A lot of these China sector funds, for whatever reason, haven't really caught on with investors in the States. The only one that's actually somewhat successful is probably CHIQ. Going forward, how are you planning on educating U.S. investors? How will you change your pitch regarding getting people to consider that there are more viable ways to play China?

Ahern: The lack of success in the sector products that are out there today just shows the lack of focus. When people have questions on China, we want to be that expert, we want to be that valued counsel to share with them what the people in China are actually saying-providing that boots-on-the-ground perspective. Now, aside from the many people who make the bullish case for China, such as Jim Rogers and Burt Malkiel, there are some who are profoundly skeptical. I'm thinking of people like Jim Chanos. I'm not trying to speak for him here, but I could quickly cook up a lot of reasons why I wouldn't touch China with a 10-foot pole, e.g., the place has endemic corruption; there's a massive pollution problem; they've got a water-shortage issue like probably no one else on the planet; people talk about the empty cities; trains to nowhere. How do you field these kinds of objections? It seems it's not too hard to start thinking, "Wow, maybe I shouldn't be so bullish." Maybe you don't want to avoid China entirely, but you don't necessarily want to go all-in, either.

Ahern: Our belief is that U.S. investors are under-allocated to the second-largest economy in the world. Is this a float-adjustment issue you're alluding to, or something more?

Ahern: I think it's that there just hasn't been a true voice providing that education on the capital markets. A lot of what's in the media, on a daily basis, is a misperception that we look to provide a countervailing voice to. For example, look at the recent GDP growth numbers that came out. It was only 7.7 percent, and all these articles that are being written are saying, "Oh, what a surprise."

In mid-March of last year, the government said, "We're going to be targeting 7.5 percent GDP growth." So, should people be surprised by the economic number that was released? No. It just shows a lack of focus on educating U.S. investors and that, if anything, emboldens us to the opportunity we have to work with U.S. investors in raising their awareness. of the things we noticed right away in the registration statement was the indexing firm. CSI is a company that has boots on the ground, right? It's a China-based firm, right? Might you be able to comment a little bit on that?

Ahern: Unfortunately, that's one of the subjects I can't speak to. OK. On a personal level, what's your role in this whole boots-on-the-ground initiative that's now gathering steam?

Ahern: I'm heading up the U.S. side of our efforts. I've joined from being with a leading provider of ETFs, where I've spent over 12 years. My entire professional life has been around exchange-traded funds. How audacious is KraneShares' audaciousness? Do you want people to be thinking "KraneShares" when they think about China in five or 10 years from now?

Ahern: Without question we do. KraneShares isn't well known today, but we think we can change that very quickly.

I was just reading an article that mentioned nine out of 10 Americans cannot name a single Chinese company. These are some of the biggest companies in the world. And when people do talk about Chinese companies, how many of those are in a negative light? The majority.

So, we'll be providing a very different voice than what's now in the media, helping to educate people. And I know that given the nature of a lot of organizations, they don't have the singular focus that we hope to provide.

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