HSBC assures punters recovery around the corner

Capital-guaranteed funds remain a proven sell, despite screaming equities buy.
HSBC Asset Management is not alone among fund managers in seeing gold in pushing unit trusts structured with capital guarantees to Hong Kong investors, but it may be one of the most successful. Two months ago one such fund raised $651 million. Now the firm is cranking out another, the Asian Recovery Capital Guaranteed Fund, which will be sold through its local commercial bank distribution network until 20 July.

This new product comes with a few twists, explains June Wong, director and head of business development. Eschewing front loads or redemption fees, the fund carries a straight (if high) 1.5% annual management fee and is ‘floored’ at a zero return -- so that returns in any negative quarter is treated as zero instead, boosting the average rate of return for the investor. But of course, only a portion of the assets go into the underlying and bullish recovery play.

This bullishness is represented in four equities indices for Hong Kong, Korea, Taiwan and Singapore. Nitin Parekh, Asian equities CIO, says these four markets represent most of Asia (ex-Japan’s) capitalization and liquidity, as well as its best companies. “It is a strong play on a global level, a regional macro level and a regional corporate level,” he says. He adds valuations in these markets are at or close to five-year lows. “It is difficult to time a better entry,” he notes.

The macro story, particularly China’s, is most compelling. Parekh believes Asia’s GDP growth this year will end up at 5% versus a predicted 6.5% for next year. This is helped by his expectation that the US economy will grow by 3% next year – admittedly most of this growth will come at the end, but equities markets should price in this expectation early. HSBC has chosen those indices – be in a local one such as Hang Seng’s or an international one such as MSCI Taiwan – that best captures the local markets.

Wong says the fund is targeted at risk-averse investors, including first-time buyers of unit trusts, who are suffering from low interest rates on bank deposits. “There are many investors not yet ready for non-protected products,” she says. “Even though we are bullish, they are still nervous.”