Huaan and Lehman launch first QDII fund

For the first time, Chinese investors get access to a variety of asset classes û and the deal shows you donÆt need a JV to manage Chinese money.
Shanghai-based Huaan Fund Management has been given approval by the China Securities Regulatory Commission (CSRC) to launch the nationÆs first QDII fund, an open-ended mutual fund giving Chinese retail and institutional investors exposure to international assets.

Huaan partnered with Lehman Brothers for the project. Huaan will control the asset allocation while Lehman will manage the underlying funds, including existing pooled vehicles as well as customised accounts, says Frank Yao, CIO at Huaan.

ôWeÆre not just sending money to Lehman Brothers,ö Yao says. ôItÆs a joint effort.ö Both parties will cooperate to provide risk management and performance attribution, for example.

The Huaan International Balanced Fund will have the following allocations: 20-70% to global fixed income, benchmarked versus the Lehman Global Aggregate Index; 10-60% to global equities, versus the MSCI World Index; and 0-15% each for US real-estate investment trusts and for global commodities, benchmarked against the Nareit Index and the Dow Jones/AIG Commodities Index, respectively.

Yao says the benchmark allocation is 45% to fixed income, 35% to global equities and 10% each to US REITs and commodities.

Lehman Brothers is also writing a five-year note to provide principal protection to the fundÆs investors.

The government is treating this as a pilot project, and various regulators including the CSRC and the State Administration for Foreign Exchange (Safe), will use it to adjust their rules in order to facilitate offshore investment.

Not only is this a big leap for a Chinese fund company, but also an example of how international money managers can do business in the mainland without having to set up an expensive joint venture.

ôLehman Brothers does not currently play any direct role in the Chinese investment management industry,ö says Peter Alexander, director at Z-Ben Advisors, a consultancy in Shanghai. ôHuaan has made the obvious decision not to work with a firm that is an indirect competitor, such as ING, Templeton or JF. [These firms have joint ventures in China.] This means that global firms without a partnership locally can begin to develop a relationship with local managers, to assist them much in the same way as the Huaan/Lehman alliance.ö

A number of large fund houses, particularly big American names such as Fidelity, Capital and Vanguard, have opted not to establish joint ventures in China.

The Huaan fund still needs SafeÆs approval and a quota, which will put a ceiling on the fundÆs size, although Yao says if it is hugely oversubscribed, Huaan may request Safe grant it a larger or second tranche. He hopes to launch the fund in September. The local custodian, ICBC, will be among the primary distributors, while HSBC is serving as the international fund administrator.

But this will not be the first time Chinese investors are able to access the foreign capital markets. Commercial banks have been able to sell structured notes, designed with the aid of foreign investment banks. These come in the form of savings products limited to global fixed-income products, or as forex-linked notes. Hence the Huaan fund will be the first time that mainland investors can access global equities or alternative sectors such as real estate and commodities.

Its challenge will be to provide high enough returns to overcome expected renminbi appreciation and still remain attractive. Huaan says the expected annualised return is 10%.

The fund will be open-ended but must be sold on a quasi-private basis; Yao says this means Huaan cannot advertise the fund in China. But it is open to both retail and institutional investors, with a minimum subscription of $5,000 û a steep figure for China. The fund is denominated in US dollars. Huaan will charge a 1.5% fee, in line with domestic equity products.

Yao says the next goal for Huaan, and the funds industry in general, is to win individual QFII quotas so it can market A-share products directly to foreign investors. But how soon the regulators will agree remains a matter of speculation.
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