Haitong International Asset Management is preparing to launch an offshore RMB high-yield bond fund for local Hong Kong and international professional investors before the end of this year as it seeks to round out its fixed-income product suite.

Joseph Lau, managing director of Haitong International AM, says the quarterly dividend fund will invest in high-yield CNH bonds, synthetic bonds, US dollar-denominated bonds issued by Chinese enterprises and convertible bonds.

“We notice that more entities intend to issue RMB bonds in Hong Kong,” he says. “To tap this trend, we plan to extend and complete our RMB fixed-income product line.

“This new fund will initially be offered to professional investors through private placement and is likely to be transformed to a mutual fund when the [offshore RMB] market becomes more mature.”

The new fund will be Haitong’s third offshore RMB fixed-income product. Last August it launched the first RMB fixed-income mutual fund in Hong Kong – Haitong Global RMB Fixed Income Fund – and it launched a private placement fund last December.

Ben Zhang, the firm’s joint managing director, notes that the global RMB fixed-income fund plays on a “large blue-chip” concept, investing in investment-grade bonds and rendering stable returns; the private fund provides higher returns by investing in both CNH and synthetic bonds; while the high-yield fund will cater to investors seeking high returns. 

The new fund will have two classes, one denominated in renminbi for Hong Kong investors and one in US dollars for overseas investors. It will target a yearly return of 7% to 8%, which will enable it to pay dividends of about 1.5% per quarter.

As of March 31 this year, the mutual fund’s return is 1.45% since inception and it has Rmb18 billion ($2.8 billion) under management. The firm’s target is to grow the fund’s AUM to Rmb50 billion, which Lau is confident it can achieve within two years.

Lau says the firm will pay dividends of about Rmb1 per share at the end of June, with the exact payout to be determined next month. He says the company’s plan is to pay dividends every half year.

In terms of asset allocation, by the end of March, the mutual fund allocated 51.1% and 2.9% of assets to fixed-rate and floating rate debt instruments, respectively, with 38.3% in term deposits and 7.7% in cash and overnight deposits.

Zhang notes that the high percentage of assets in deposits is a trading strategy chosen by the portfolio manager.

“Anticipating more rate hikes to come, the PM prefers to invest in [bonds of] shorter duration and maintain a higher level of liquid assets”, says Zhang, noting it provides the portfolio manager with flexibility to choose securities with better risk-adjusted returns from an expanding pool of RMB fixed-income instruments.

Zhang says that Haitong has maintained its first-mover advantage in RMB fixed-income investments, especially in terms of access to new CNH bond issuance.

“We were the anchor investor when McDonald’s, Galaxy Entertainment and Sinotruck issued their RMB bonds, and also the lead investor in Caterpillar, China Resources and China Power International,” he says.

Lau anticipates a rich pipeline of offshore RMB bonds as more entities plan issuance in Hong Kong. He adds that the company has applied for a mini-QFII licence which, once obtained, will enable its RMB fund series to invest in China’s onshore market.