With turmoil in the Middle East and rampant growth in China, it seems a safe bet that these sectors will continue to deliver solid returns in the long term. During the past three years the target industries have outperformed the worldÆs biggest equity indices and, compared with the previous five years, global energy demand has grown 200% during the five years to 2005.
Base metal prices have been rising since mid-2001, thanks largely to growth in China and India, and the low rates environment of the past three years has allowed utilities companies to reduce their debt level, strengthening their overall financial positions.
All of this paints a picture of an industry group with stable, if not stellar, potential in the long term, which is precisely the point. "The aim is to deliver stable income for conservative investors who want downside protection," says Wendy Kwan, director, investor solutions, at Barclays Capital in Hong Kong. "This product should be helpful in stabilising an investor's whole portfolio because it has low volatility."
This is BarclaysÆ first offering in the Hong Kong market, after launching 10 structured funds in Singapore last year. The offer period runs until February 15 and the fund will launch on February 23, with distribution through the main banking outlets in Hong Kong.
It offers an enticing first-year dividend payout of 9.8% on the principal amount, paid in quarterly chunks of 2.45%. The dividend payment is guaranteed by Barclays, though the principal amount itself is not protected. The guarantee provides a degree of comfort for year one, not to mention a marketing boost for the fund launch, but Barclays is confident of hitting at least a 9.8% dividend return after year one.
The stocks are selected from the target sectors based on three criteria: a market capitalisation of at least $500 million, average daily turnover of at least $10 million and a minimum 75% buy-and-hold ratio from analyst recommendations on Bloomberg. In other words: big, liquid, stable stocks.
Within this universe of stocks Barclays first selects any that are expected to pay dividends in the next quarter, then those with the highest historical dividend yields, up to a basket of 20 stocks. Each stock in the basket is given equal weighting. This step is repeated each quarter.
This investment strategy offers three potential sources of return: dividends from the stocks during each quarter, the potential upside of the 20 stocks in the basket and income through the use of the options strategy.
The options strategy locks in the stable returns that give the fund such low volatility. Buying put options limits the potential downside of each stock to a maximum 10% in each quarter while selling call options generates income for the fund and at the same time limits returns in a bull market.
The fund has a preliminary charge of 5% and an investment management fee of 1.75% a year.
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