Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The strategy is long/short. Approximately 30% of allocations will be made to the Chinese A share market, with 70% going to H shares, red chips, Taiwan stocks and Chinese shares listed in the USA.
"We are principally looking for potential earnings revision,ö says senior portfolio manager Mandy Chan. ôWe expect a strengthening of the Rmb in the second half of 2008 that is faster than generally expected. I'm currently positive on property and the financial sector, given expanding net interest margins and rising non-interest income. The price-to-book ratios of banks are not cheap, but they do offer 30-50% earnings growth."
Mandy Chan has been managing the Hong Kong and China equity portfolios of ABN Amro with assets under management of $8 billion. ABN Amro already operates the $1 billion China Equity Fund that was launched in 1995. Before joining ABN Amro in 2004, she managed the absolute return product at Pacific Century Insurance.
Fees for the new fund are 1.5% and 20%. Gross exposure will be a maximum 300% and net exposure of -30%.
Even though market volatility is currently 30% for H shares and 40% for A shares, the envisaged volatility for this fund will be 20% via the use of hedging to keep it under restraint.
There will also be some intra-sector pair trades within the portfolio. For example, Chan likes China Construction bank on the long side, given its ability to get higher yielding loans ands better net interest margin, and on the short side, Bank of China, due to it having the smallest exposure of its peer group to consumer lending and highest sub prime exposure.
Goldman Sachs is the prime broker and HSBC is the fund administrator.
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Hesitancy aside, institutional investors eye Australia and Japan as promising geographies for private debt investments within Asia Pacific, with Greater China and Korea on the periphery.
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