ABN AMRO Asset Management has launched a Hong Kong Equity Guaranteed Fund tailored to a recovery environment and investors focused on a medium-to-long term outlook. The new fund is linked to a basket of 10 blue chip on the Hang Seng Index and the Hang Seng China Enterprises Index.
The fund launched yesterday (February 1) and will be open until March 31. It has a 100% capital guarantee, a 5% first-year guaranteed return and a potential additional bonus of up to 55% upon maturity.
To ensure the 5% guaranteed return and the 100% capital guarantee on the promised dates, the fund will invest the bulk of its capital in a discounted USD fixed-income instrument. The remainder of the total assets will be invested in an option strategy, which captures the average performance of the basket of 10 stocks.
As with the capital guarantee and the first-year guaranteed return components, the additional bonus is protected by a safeguard mechanism, wherein if markets turn sour the maximum loss to the bonus will be 5%. The sum total of the bonus will result from the initial bonus level (55%) minus any monthly negative performances of the stock basket.
"This product has been designed with retail investors' protection needs in mind, says Pieter Oyens, head of products management, Asia-Pacific. "First, it delivers 5% return at the end of year one. Second, it provides 100% capital guarantee at maturity. Third, to optimise the potential upside, ABN AMRO has installed an innovative 'step-down cap' which limits each initial bonus level adjustment to 5% if the stock basket experiences excessive loss in a particular month.
According to ABN AMRO Asset Management, the fund's launch is the result of a positive economic outlook for Hong Kong, a period of stable volatility and the GDP growth of the SAR and the Mainland. In particular, it is confident that the upside potential of the new fund will stem from the continual boom in the tourism and retail sector, with the firm estimating retail sales growth to climb 10.5% in 2005.
ABN AMRO Asset Management also believes that an expected drop in the unemployment rate to 6.1% from 6.5% will provide a positive backdrop for the Hong Kong economy, as will the continual success of the Chinese economy.
"The market has regained its confidence and Hong Kong saw a steady recovery in 2004, says Julia Lee, vice president, investment fund services, Hong Kong. She also stresses that the Mainland's rising per capita GDP and continuing urbanization will lead to increased demand in energy and other commodities.
The relatively low and stable volatility of the Hang Seng Index is another reason behind the fund's rollout, with ABN predicting falling volatility levels. It contrasts the Hang Seng's 250-day annualised volatility of 16.32% (as of December 2004) with regional comps such as Thailand, which tops the region at 24.29% annualised volatility.
The fund basket consists of some of the biggest names on the local equity scene and are broadly diversified over numerous sectors. On the Hong Kong-based side, Cheung Kong Holdings, HSBC Holdings, Hutchison Whampoa, Sun Hung Kai Properties and Swire Pacific "A make up half the basket, while PetroChina, CNOOC, Huaneng Power International, China Mobile Hong Kong and BOC Hong Kong Holdings complete the China constituent.
Unlike ABN AMRO's other guaranteed funds, the Hong Kong Equity Guaranteed Fund has no sales or redemption charges, with a maximum upfront management fee of 1.25% per annum. With a minimum investment of $5,000, the fund will start on 8 April and reaches maturity on 27 February 2009.