JP Morgan is preparing to launch a dividend-paying multi-asset fund to tap retail demand for diversified sources of income in a low-yield, volatile investing environment.
The fund will predominantly invest in five asset classes, which at inception will be roughly allocated as follows: US high-yield debt (40%); emerging market debt (20%); high-yield global equities (15%); high-yield emerging equities (15%); and real estate investment trusts (10%).
The Hong Kong-domiciled fund is being marketed and sold to Hong Kong investors. It will offer a monthly dividend, which will be allowed to accrue for the first three months to determine sustainable pay-out levels. Its yield will come from a combination of the coupon from its majority fixed income assets and dividends from equities and Reits.
Fund manager Jonathan Lowe anticipates no change in dividend distribution for six months, after which it will be reassessed in accordance with prevailing conditions. “One of the things we are determined not to do is to cut into the capital to pay out dividend distribution,” he says.
Asked about target yield, Lowe says there are no guarantees but that the fund’s customised benchmark has produced a 5.3% yield over the past 12 months.
A range of firms have been launching multi-asset funds amid uncertain market visibility. Lowe says the genesis of this idea came from his colleagues in the US who launched a diversified income fund in May 2007, encompassing US high-yield, emerging market bonds, Reits and high-yielding global equities.
This US fund has since introduced emerging market equities, global convertibles, mortgage-backed securities and US leveraged loans. The average yield over its life has also ranged between 5-6%, and it now has over $2 billion in assets.
Late in 2008, JP Morgan launched a global income fund domiciled in Luxembourg and featuring a mix of investment grade corporate bonds, high-yield bonds, convertibles, high-yielding equities as well as emerging market debt.
Asked about timing, Lowe notes that JP Morgan has been talking about replicating this type of product in Asia for over a year. “We saw there was clear demand from an investor base looking for diversified sources of income,” Lowe tells AsianInvestor.
“But I had concerns three months ago, as equities continued to rise and fixed income spreads to narrow, that maybe the income returns we would be able to achieve from this would not be sufficiently attractive. Given the shake-out we have had, we can look at it in a more positive light.”
He concedes key risks include dividends being cut and an acceleration in high-yield debt defaults in the event of recession. “But our sense is that the high-yield market has already priced in to a certain extent a deterioration in the default experience, with the recent pick-up in yields we have seen.”
The fund has had a volatility rate over the past 12 months of 8-12%, compared with 7-10% for a global balanced fund and 12-15% for a pure equity fund. Downside protection comes from diversification between asset classes and the lower volatility of high-yielding equities.
Lowe adds this is a daily-dealt fund with no constraints on entering and exiting different asset classes and markets. “How frequently they change depends on market circumstances,” he notes.
“Obviously the fund’s number one objective is maximising income return, so there will be a natural desire to make sure we can achieve that yield for distribution. If that means we need to increase the exposure to fixed income, we will. But we also want this to be a multi-asset product.”
Asked whether the fund might be exported elsewhere in Asia, he says the next market to target would be Taiwan, but that requires a minimum 12-month track record.
Fundraising started in Hong Kong last week and runs to September 9, with trading scheduled to start on September 12. Lowe is targeting $30 million to $50 million in assets at the outset.
The initial charge is up to 5% of net asset value, with no redemption charge and a 1.25% management fee. During the offer period the fee is 1%, with minimum subscription of $2,000 or monthly investment of HK$1,000. It will largely be sold to retail investors through JP Morgan’s website, IFAs and bank intermediaries.