China Merchants Fund to launch Bric Index QDII fund

The company will issue the product in January to gain broader emerging-market exposure via ADRs and GDRs listed in the US and UK, and Chinese stocks in Hong Kong.

China Merchants Fund (CMF) is planning to launch a product for qualified domestic institutional investors (QDII) next month to invest in stocks on the S&P Bric 40 Index.

Tony Liu, deputy director of CMF’s product department, says its Bric index fund will be listed on the Shenzhen Stock Exchange after the January launch.

The constituent stocks of the S&P Bric 40 are mostly blue-chips in the energy, materials, financial and technology sectors across the four Bric markets. They include companies such as Baidu, Tencent, Lukoil, Gazprom, Infosys and Reliance.

“Bric countries recovered quickly from the global financial crisis, given their strong fundamentals and healthy trade balances, and are poised to continue benefitting from global growth,” reasons Liu. 

The fund weightings for the Bric countries will be 40% in Chinese stocks listed in Hong Kong and the US, 25% each in Brazilian and Russian stocks and about 10% in Indian stocks.

The Russian, Indian and Brazilian stocks that CMF will buy come in the form of depositary receipts listed in the US and UK (ADRs and GDRs), meaning the fund will invest in three markets overall, including Hong Kong.

“We can buy Brazilian stocks listed in the US and Russian stocks listed in the UK, so that we can avoid problems such as currency non-convertibility,” notes Liu.

According to Chinese law, 5% of a fund must be held in cash in case of redemption. However, a passive index fund is built to track net total return of the index. Therefore CMF is allowed to use index futures to bridge the 5% gap between the underlying stock positions and the S&P Bric 40.

Looking ahead, Liu reveals that CMF is also eager to tap investment opportunities in emerging Asian markets. “We are looking at Southeast Asian countries such as Malaysia, Indonesia, the Philippines and Thailand,” he says, noting how these economies are in line to benefit from economic growth in China as a key export destination. 

“For instance, Indonesia exports a significant amount of coal, palm oil and rubber, which are strategically important natural resources for China,” he adds. “And such commercial trading will be more active when the RMB is more widely used in trade settlement.

“Leaving aside the topics such as deleveraging, austerity, QE2 and the US tax vote, the risky assets in emerging markets and commodities might be the bright spots in the early stages of global recovery.”

Liu adds that the company is still weighing how ready domestic investors are to embrace opportunities outside of the China-centric theme of QDII products.

CMF currently manages a global resources equity QDII fund, launched in March this year. 

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