Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
That should mean a windfall for investors in the water sector, according to Lyxor, whose Dynamic Water Fund promises to provide Hong Kong investors with handsome returns by tracking the performance of the world water total return index, which comprises 20 of the biggest organisations involved in the water utilities, infrastructure and treatment sectors.
The premise is simple enough. As our population grows and more people move from the countryside to cities, the pressure on old and leaky water infrastructure will be too great. Pollution and rising per-capita water consumption could tip the balance further towards a serious water deficit.
The United Nations is forecasting a global population of nine billion by 2050 and water usage is already outpacing that growth û even now, more than one billion people have no reliable access to clean drinking water and almost two-thirds of China's 660 cities face water problems of one sort or another.
Even so, unlike rogue meteorites or killer diseases from China, it seems that we can fix the water shortage. The World Bank estimates that $600 billion of investment during the next decade will be enough to alleviate water scarcity.
Investors have already started to tap into this story in Europe and the US, but Lyxor's water fund is the first such offering in Hong Kong. "The water sector has outperformed both gold and oil recently, with less volatility," says Andrew Au, from the structured products group at SG in Hong Kong. "And when you look at the asset class, you really can't find anything that can act as a substitute for it."
It is not a simple index tracker û with annual fees of 1.75% you would hope not. Instead, it aims to outperform the benchmark index using leverage to boost returns, correlation trading to minimise transaction costs and volatility caps to protect the downside.
The underlying index is only one-year-old, but Dow Jones and Sustainable Asset Management Group, the index compilers, provide historical data back to 2004. Lyxor used this data to build a dynamic trading strategy. The analysts noticed that volatility in the water asset class can affect performance in a big way. When volatility rises, it usually signals a downward trend, and with stable volatility the index rises.
To start with, the fund is invested 90% in equities and 10% in a structured note that acts as a tool for Lyxor to leverage or de-leverage the allocation as necessary. When volatility rises above a pre-determined level, the strategy kicks in and Lyxor uses the structured note to take, in effect, a short position against the equities. When the strategy is bullish on the index, the note is used to leverage the allocation, creating up to 150% equity exposure.
Using a structured note to adjust the exposure saves on transaction costs from trading in and out of the equities. To reduce costs further, the fund doesn't necessarily invest in the actual stocks in the index. Instead, it selects stocks that closely track the performance of the index, but which can be traded more cheaply due to their higher liquidity.
The result is a product that Lyxor says is suitable for investors who want to diversify their portfolio and optimise potential returns. Based on historical data the fund outperforms the water index by 9% a year to give a total return of 41%, net of fees and charges.
The initial sales charge is 5%, annual management fees are 1.75% and the minimum investment size is $3,000. The fund is on offer in Hong Kong until April 13.
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