May 2010

FUND LAUNCHES: Reaching new heights

Ucits III funds continue to shape product development, while the economic landscape provides opportunities in high yield, finds Nick Fitzpatrick in a review of recent fund launches paper_planesThe shortage of bank finance for companies, a key characteristic of the credit crunch, has seen AllianceBernstein launch a high-yield bond fund. Meanwhile, Ucits III regulations are still prompting other fund managers to launch products with wider investment powers, our brief survey of recent fund launches shows.  Emerging markets and China product development also continue to attract activity.

The scarcity of bank loans for companies is a key reason for AllianceBernstein’s launch of the Euro High Yield Portfolio, a Luxembourg-based Sicav, in April.

Arif Husain, director of UK and European fixed income, believes the European high-yield market will grow significantly over the next few years as more companies access bond finance.

“Companies are having to turn to bond markets as bank lending has shrivelled up,” he says.

There have also been many company downgrades, particularly financials, which will further increase finance needs.

US high-yield bonds are also being made available by Axa Investment Managers, which launched a fund into the UK market in April. The fund targets between 150 and 250 better-quality US high-yield bonds. The bonds have a short duration which is intended to  lower the interest-rate risk.

The fund, which is offshore and structured as an Oeic, is aimed at institutions and large intermediaries with a minimum of £1m (€1.15m) to invest.

Anne Yobage, senior portfolio manager, says: “The US high-yield market represents over 80% of the global market and contains numerous investment opportunities.
“When interest rates around the world begin to rise after the global economic recession, short-duration high-yield bonds continue to offer interesting opportunities.”

The US market in high yield may be larger than in Europe, but Husain, at AllianceBernstein, believes the European market will triple in the next few years. “While the US high-yield market has traditionally eclipsed Europe, European companies have never been as eager to issue high-yield debt as they are currently,” he says.

Both firms say the high-yield market is difficult to research, but they are able to leverage the capabilities of their internal analysts. Husain says this is particularly true of financials.

Pictet, HSBC and LGT Capital Partners are among firms with recent fund launches that use the extended investment powers of Ucits III rules to offer long-short products.
Pictet Funds, part of Swiss private bank Pictet & Cie, has launched the PTF (Lux)-Corto Europe Fund, a Luxembourg-domiciled long-short European equity fund with a mid-cap bias. Pictet says the launch follows the successful track record in this strategy displayed by the performance of Corto European Fund, a Cayman Island-registered equity long-short fund launched in August 2006.

HSBC Global Asset Management launched the HSBC Gif European Alpha Equity Fund, an absolute return fund. It seeks opportunities across developed Europe and is implemented primarily through equities and equity swaps.

The fund will use more short positions to diversify risk, holding about 80 stocks, typically split between 35 long and 45 short.

Charles Robinson, global head of alternatives distribution at the firm, says the launch “appears timely as the market backdrop seems more conducive to our market-neutral strategy than the liquidity-fuelled environment that defined most of 2009”.

HSBC has been running the same strategy within its flagship European Alpha Fund, domiciled in the Cayman Islands, since April 2008. Since then, the fund has outperformed the MSCI Europe Index and generated alpha on both the long and short portfolios, the firm says.

Robinson adds: “This is not simply a Ucits clone of our popular Cayman-domiciled European alpha fund. Rather, it is a strategy constructed with daily liquidity in mind, greater capacity, and a risk/return profile that falls somewhere between our base class and our 2.5x levered share class. While it is the same team and the same philosophy it does differ, as the low correlation with the existing fund reveals.”

Annual management charges are 1.5% for retail and 1% for institutions. There is a performance fee of 20% over one-month Euribor.

LGT Capital Partners was scheduled to launch the Crown Managed Futures Ucits Fund in May to give a broader range of investors access to its flagship managed futures strategy, which has assets under management of US$670m (€510.4m). The fund provides exposure to hedge fund managers trading commodities, equities, fixed income and foreign exchange.

The strategy has delivered an annualised gross return of 10.5% since its launch in October 2000, compared to -2.1% for the MSCI World Index, showing almost zero correlation to equities.

Werner von Baum, partner, says the Ucits launch was prompted by strong demand from private clients, intermediaries and institutional clients.

Back in January Veritas Asset Management restructured its Global Real Return Fund in to a Ucits III vehicle to provide more liquidity in the hope of appealing to more clients.
Though a long-short fund, Richard Meyrick, director of sales and marketing, says the fund does not seek to generate alpha through shorting but to protect returns instead, by using index futures and options to hedge exposure.

The fund seeks to invest in 25-40 companies out of a universe of 200 that will return at least 15% pa.

Emerging markets
Fund manager enthusiasm for emerging markets, including China, shows no sign of abating. Unigestion, a privately owned asset manager with more than $10bn of assets under management, has launched a minimum-variance equities fund called the Uni-Global Minimum Variance Emerging Markets Fund.

Fiona Frick, managing director of the firm’s minimum variance activities, says this approach will reduce volatility, which is the price to pay for higher returns in the emerging market sector. “If you minimise risk, you will outperform in the long term.” $3.3bn of Unigestion’s total assets are invested in minimum-variance equities. Although the new fund is Ucits III and could, therefore, use certain derivatives, all investments are in equities.

Threadneedle, which invests £8bn (€9.2bn) in emerging markets, has launched a new investment strategy via the Threadneedle (Lux) Emerging Market Corporate Bonds Fund.  The fund invests principally in debt issued by emerging market companies and companies that conduct a significant part of their business in emerging markets.
Richard House, head of emerging market debt at Threadneedle, says: “As emerging market economies mature, the corporate bond market will develop further in order to finance the growing domestic consumer base.”

Baring Asset Management launched a fund investing in Chinese A-shares – the shares of companies listed in Shanghai and Shenzhen and offer a wider variety of companies and sectors than the Hong Kong exchange.

The Baring China A-Share Fund plc has $200m committed from institutional investors. The full capacity of the fund is $285m.

At least 70% of the fund’s assets will be invested in A-shares of Chinese companies. The fund will be managed by Hong Kong-based Agnes Deng, Barings’ head of China equities, who also manages the Baring Hong Kong China Fund, currently one of the largest of its type with assets of $4.736bn as at 26 February 2010.
Deng says: “The long-term case for China is extremely strong right now. There hasn’t been a boom-and-bust cycle and the
GDP growth of 8.7% exceeded expectations in 2009.”

The A-Share market has a market capitalisation of $3.49 trillion and a healthy daily turnover of $26bn, making it the world’s third largest equity market.

©2010 funds europe

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