Thailand’s trigger-fund trend tipped to slow

The Thai bourse has been on a tear and trigger funds have flooded the market. But Cerulli expects competing products to emerge in 2013 as the phenomenon runs out of steam.
Thailand’s trigger-fund trend tipped to slow

A wave of trigger funds launched to capitalise on Thailand’s surging stock exchange is tipped to thin out in the second quarter, with the market rise seen as unsustainable.

No fewer than 73 trigger funds were issued to Thai retail (and high-net-worth) investors last year, raising Bt25.9 billion ($868 million), according to Cerulli Associates.

The trend accelerated in the fourth quarter, when 29 trigger funds were launched – accounting for more than half of the 53 new products for the quarter.

Some 75% of trigger funds issued in 2012 were in domestic equities, 14% in non-Thai equities (chiefly China A-shares and Asia-Pacific equities), 5% in alternatives and the rest in mixed assets.

But just one fixed-income trigger fund was launched in 2012, by Siam Commercial Bank (SCB), notes Cerulli.

The driver for this trigger trend is that the Stock Exchange of Thailand has been on a tear, rising 37% since June 1 to close at 1,530.32 on February 26. The past three months, in particular, have seen a 20% rise.

“Everyone has been jumping on the bandwagon,” notes Cerulli analyst Alec Ng, who puts the average total expense ratio for trigger funds at 3% per annum.

In January alone, 11 trigger funds were launched. It compares with the whole of 2011, when about 46 trigger funds were issued (Cerulli did not have precise data to hand).

In some of the launches last year fund houses – domestic and international – were hitting their IPO targets within two or three days. They might immediately launch another one to capitalise on demand.

Towards the end of the year, when the Thai equity market was booming, the average time to redemption was less than two months. In fact, the quickest of the year was Tisco’s China Trigger 4, whose 8% target was triggered 28 days after launch.

But Ken Yap, Cerulli’s head of Asia-Pacific research, is among those anticipating a slowdown. “We expect other products will likely present more competition to trigger funds from the second quarter of the year,” he says.

Yap notes that many fund houses in Thailand are discussing potential new product launches including property and infrastructure funds in 2013.

Cerulli adds that trigger funds are not popular with the largest domestic houses in Thailand. It notes Kasikorn Asset Management has not issued any, while SCB AM has only issued a few.

“A sign that trigger funds may not be able to sustain the growth is evident by the fact that the biggest players are not really involved,” says Ng. “You would suspect they are not convinced the index will continue to rise, so we are taking cues from them as well.”

In fact, AsianInvestor wrote about the popularity of trigger funds back in March 2011. At that time, Kasikorn AM managing director Patchara Samalapa dismissed them as unfair.

What has changed since then, Cerulli notes, is that there are simply more players issuing these products nowadays.

Trigger funds are particular to the Thai market within the Asia-Pacific region. Cerulli indicates they are specially aligned to suit certain characteristics of Thai investors.

Essentially they are automatically redeemed when they reach a set target return, usually between 7-10%. But their structure is not uniform.

Some have an auto-redemption date (three or six months), meaning they automatically close whether they reach target return or not. Others revert to normal open-ended funds and start taking redemptions.

Of course when there is a reversal in the market, investors will lose money. Cerulli notes that trigger funds are ranked a 6 out of 9 by securities regulator SEC in terms of their risk profile.

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