KBC Asset Management settles into region

The guaranteed-fund specialist looks to expand beyond its Hong Kong base.

KBC Asset Management, a unit of Brussels-based KBC Bank and Insurance Holding, has established a presence in Asia and is looking to grow its business in providing structured funds to the retail and high-net worth market.

It opened an office in Hong Kong this year and recently launched its first guaranteed mutual fund for this retail market via an exclusive distribution arrangement with HSBC. That launch raised over $100 million, says Rex Lo, vice president of structured products and the person spearheading KBC AM's regional effort.

The firm is looking to build a track record over the next six months or so in Hong Kong before entering other regional markets such as Singapore and Taiwan. In addition, the firm's Belgium-based managing director, Erwin Schoeters, has just visited Shanghai and Shenzhen, where he met Chinese mutual fund companies to explore the possibility of doing a joint venture.

Schoeters says the firm has yet to decide whether to enter a Chinese JV. If KBC decides it wants to enter that space, he expects it would take two or three years to find the right partner and implement a plan.

KBC AM leverages off its affiliate, KBC Financial Products, which is a derivatives specialist that has been active in Hong Kong since 1998. KBC Financial Products issues equity warrants, structures high-yield notes and trades convertible bonds. Its derivatives services for clients such as HSBC Republic created an opening for KBC AM to win a powerful distribution platform.

Schoeters acknowledges the guaranteed fund craze in Hong Kong and Singapore may have peaked, but argues these funds are now an established part of the regional landscape. He notes that guaranteed funds have been around in Europe for over a decade and still comprise 20% of the retail market in countries such as Belgium, Spain and France.

KBC AM manages a total of Eur62.9 billion ($70.9 billion). Of that, Eur43 billion is in mutual funds, most of which are structured. The firm has launched about 500 guaranteed funds in its lifetime - its first was 1993, when it first rose to prominence as a European funds manager - and maintains around 300 structures to choose from. Its first Hong Kong-authorized product, the Sunflower Capital Guaranteed Fund, is registered in the Cayman Islands.

The firm has prepared an array of other structured products to roll out and is in talks with HSBC about when the bank will want another, says Lo. Over time KBC AM intends to expand its distribution base as well.

KBC AM is also keen to launch hedge funds for this region, but "We like to take things one step at a time," Lo says. The firm has recently launched a global market-neutral long/short fund in Europe that it may one day bring to Hong Kong, for example.

Schoeters says the low-interest rate environment will force manufacturers to innovate to maintain profitability. But he's confident there will be plenty of workable structures for guaranteed funds.

One solution may be longer-dated maturities coupled with the possibility of early redemption. Schoeters says KBC AM's average product is six years, with some structures extending to 10 years. Investors don't like to keep their money locked up so long, so some of these European funds are liquid and have low exit charges. "Maybe we'll introduce that kind of structure to Hong Kong," he speculated.

Another possibility is to reduce the guarantee to 90-95% of principal, which becomes easier to do as the underlying equities environment improves.

There are other practices, however, that KBC AM will avoid because they have led to instances of mis-selling in Europe. For example, some firms in Europe have sold structured funds calculating an option's average price, rather than its closing price, which can give investors a higher participation rate but has also sewn confusion.

Ultimately, KBC AM believes interest rates have already hit bottom, so the problem of creating profitable structures will become less acute.

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