China’s first QDII fund is preparing to repay investors their principal in full after settling a legal dispute with defunct US investment bank Lehman Brothers in what proved an inauspicious beginning for a government pilot project that continues to disappoint.
In an announcement on its website yesterday, Hua An Fund Management revealed its Global Balanced Fund, launched in 2006, will redeem at a net asset value of $1 when it expires on November 2.
It states that Lehman Brothers Europe will pay Hua An $44.9 million and interest of 2.25% from September 1, 2009, to November 2, 2011. This brings the NAV of the qualified domestic institutional investor (QDII) fund to $0.97.
Hua An will pay the remaining $2.9 million to ensure investors are redeemed in full. However, taking into account renminbi appreciation over the past five years, investors in the fund have lost over 18% in currency terms.
The company says it has communicated this arrangement to the majority of the fund’s larger investors, whom have expressed positive feedback.
As AsianInvestor reported in 2009, Hua An’s QDII fund raised assets in China and invested the proceeds into guaranteed notes issued by a special purpose vehicle (SPV) named Lehman Brothers Special Financing.
In turn, the vehicle received a 100% guarantee provided by Lehman Brothers Finance during the first investment stage of five years, starting from inception on November 2, 2006.
Under this structure, the SPV invested the proceeds passed on by Hua An into seven mutual funds managed by Lehman’s asset management arm, including Benchmark-free Euro Equity Fund, Alpha Fund-Global Value Fund, Alpha Fund-Straus US Equity Fund, Global Bond Fund (Offshore), USD Liquidity Fund and the Strategic Commodities Fund.
Essentially, the QDII fund is a global asset allocation fund of funds (FOF) investing equally (in terms of weighting) in four asset classes of equity, fixed income, commodities and Reits, and the investors’ principal is guaranteed by the issuer of the structured notes.
Since Lehman could no longer manage the assets and provide a guarantee for investors after it was declared bankrupt, Hua An stopped investor redemptions from its QDII fund on September 18, 2008, but promised investors it would fully indemnify their losses.
Within 10 days the High Court in Shanghai accepted Hua An’s case against Lehman Brothers Europe and froze the latter’s assets within mainland China. On June 15 and 16 the following year the court heard the case and urged the two parties to negotiate to reach a settlement.
Hua An does not have a similar fund for investors to switch to directly by November 2, although it does have two other QDII funds under management: Hong Kong Select Equity and Greater China Equity. It is also waiting for an S&P Global Oil Index Fund to be approved by the China Securities Regulatory Commission.
The Chinese government treated Hua An’s Global Balanced Fund as a pilot project to allow domestic fund management companies to invest overseas. However, the voyage has turned out to be anything but smooth over the past five years.
According to data provider Wind Info, by the end of last week, the 44 existing QDII funds have accumulated a loss of Rmb45 billion ($7 billion). Just six funds have recorded positive accumulative returns, including two gold funds launched this year (Lion and E Fund).