Trigger funds, which close when they have delivered the target return or reached the end of their investment period, have proved hugely popular over the past six months or so in Thailand.
More than 85% of Thai portfolios are invested in debt-related products such as bond funds, but these have been looking less attractive as interest rates rise. Trigger funds benefit from strong stock-market volatility, as demonstrated by their performance in the past few months, with many closing well within their timeframe, which is typically a year.
The products are also popular among fund-management firms as they are relatively easy to structure, launch and sell.
However, some fund managers raise issues with these products. Kasikorn Asset Management, the biggest Thai asset manager with $21.79 billion in AUM, does not offer trigger funds because “we don't think it's fair", says managing director Patchara Samalapa. "It’s a by-product of not being able to advise clients when to sell.”
He points out that if the market rises by more than the target level in the investment period, the investor loses out on the upside, plus no-one provides advice on when to sell.
He suggests that linked notes with protected downside are a better way to gain similar exposure, although admitting that these would be harder to explain and therefore sell.
However, Jumpon Saimala, chief executive of ING Funds Thailand in Bangkok, argues that investors need no advice on selling due to the auto-redemption feature which is explained to investors before they buy, as per regulations.
The fund manager will monitor market timing, so investors who don't have time to monitor the market can relax and let the fund manager do it for them, he adds.
Investors in such funds are aware they can expect only 10%, he says, and if they want to take higher risk, they can invest in open-ended equity funds, for which they may need advice.
As for Samalapa's point about linked notes with downside protection, Saimala argues that such products do not provide the same participation rate as trigger funds, because of the higher costs charged by the issuer.
Pavinee Ongvasith, head of provident funds at Tisco Asset Management in Bangkok, makes a similar point. With regard to linked notes, investors tend to forget the fact that they have issuer risk and relatively low participation in returns, assuming they want capital protection, she says.
As for the lack of advice, she says: “If you look at it from the investor’s point of view, trigger funds’ features are clear cut – they have a one-year investment at most, and if they hit their target they will receive what they expected and don’t need to be worried about the timing skill of the fund manager.”
Ultimately, it's a matter of preference based on expected return versus risk tolerance, and no single product is absolutely or always better than another, notes Araya Thirakomen, president of Tisco AM. Investors who buy trigger funds might be those with a higher risk profile and higher expected returns than those who buy capital-protected linked-note funds, she adds, or they may simply be too busy to track returns.
Finansa Asset Management, ING Funds, MFC Asset Management and Tisco AM are among the firms to have had significant success selling trigger funds in recent months.
Tisco launched two trigger funds in the third quarter of 2010: the Asia Leaders 15% Trigger Funds #1 and #2 raised a total of Bt800 million ($26 million) in the third quarter of 2010 and hit their trigger levels by January.
And, just last month, the firm launched an SET Equity Trigger 11% Fund, which raised Bt350 million, and a Greater China Trigger 15% fund, which took in Bt320 million and invests in exchange-traded funds in China, Hong Kong and Taiwan.
ING Funds launched a trigger fund in early February, the ING Thai Equity Trigger 10% #2 Fund, which raised Bt1 billion between February 8 and 14. It is an actively managed, absolute-return style product, where ING tries to hit the 10% target as quickly as possible, within an investment period of 12 months.
If the fund reaches 10% it will auto-redeem and all the money will transfer into a money-market fund, the ING Thai Cash Management Fund. If the fund does not hit the target within 12 months, it will allow investors to redeem units on a daily basis (without a new subscription).
The firm then launched ING Thai Equity Trigger 10% #3 Fund, which took in $33 million between February 23 and March 3. It launched its first trigger fund in April 2010, which hit its 10% target after four-and-a-half months.
“You need to look at market timing when launching this kind of fund,” says ING Funds' Saimala. If the market rises very quickly, the asset manager will hold off launching because of the reduced upside potential.
Other underlyings include gold, with one example being the MFC International Gold Spot 7, a trigger fund launched last month that invests in gold with a 10-month investment period and target return of 7%. MFC reportedly plans to introduce five more trigger funds this year.
And Finansa AM launched Finansa Star Trigger 7 last month, which invests in high-growth and fundamental stocks on the Thai stock exchange, particularly in the agribusiness, food & beverage and energy sectors. The investment period is six months with a target return of 7%.