Bond fund attracts more than $2bn

PUBLISHED : Sunday, 10 July, 2005, 12:00am
UPDATED : Sunday, 10 July, 2005, 12:00am

HSBC keeps it simple for Hong Kong investors in a new vehicle with blue-chip pedigree that trades like a normal security and rivals US Treasuries in stability

Mention bond investing to the average Hong Kong punter and you are likely to be greeted by a roll of eyes. The stock market has offered better potential returns and there have been few bond-investment vehicles available that provide the easy access and high-quality credit ratings necessary to lure funds out of cash deposits.

However, a new product listed on the stock exchange and widely viewed as an alternative to US Treasuries is changing the game, according to Cecilia Chan, head of fixed income at HSBC.

Denominated in Hong Kong dollars, the Asia Bond Fund (ABF) is a milestone in Asian financial history, she says, because it represents a coming of age for the regional bond market. Developed with the blessing of regional central banks, the fund comes with a blue-chip pedigree, low management fees and a handsome 3.69 per cent yield that outpaces the returns on cash deposits.

'This is a very important event in the Hong Kong dollar market,' Ms Chan says of the fund's introduction on the Hong Kong stock exchange last month. 'One can argue this is a more stable product than [US] treasuries.'

The first exchange-traded bond fund to list on the Hong Kong stock market, the product will trade much like a normal security. Investors will be able to access the fund using their regular securities trading accounts. Commission fees are the same as securities trading, however no stamp duty will be applied to the transaction. Units in the fund can also be purchased over the counter at leading banks and subscribed to in regular monthly instalments in minimum contributions of $1,000.

The fund will track an underlying basket of Hong Kong dollar denominated debt instruments. The composition is roughly 70 per cent Hong Kong government paper, 30 per cent quasi-governmental debt such as the MTR and KCR and the Hong Kong Airport Authority, and a small portion of debt from international agencies such as the Asian Development Bank and the International Finance Corporation. There are no initial fees at purchase, and annual maintenance charges amount to 0.12 per cent, a fraction of the annual charges associated with an actively managed fund.

The fund was developed, in part, with the intention of invigorating the regional bond market, and is viewed as the first serious attempt to launch a bond fund with global appeal. Eight more bond funds similar in nature will be released in coming months, part of a general agreement between regional central banks to bolster domestic product offerings.

HSBC marketing literature describes the ABF as suitable for young investors, income seekers and income preservation. Since launch three weeks ago, the fund has attracted more than $2 billion.

Historically, bonds offering a 3 per cent yield are considered expensive, but Ms Chan believes the ABF is entering the market at an opportune moment that coincides with the peak of the US interest rate cycle.

The Federal Reserve, she says, will increase interest rates an additional 50 basis points by the end of the year before halting or even reversing tack. In fact, the yield curve - the pricing of fixed income instruments across different maturity dates - is flattening. This means the bond market is anticipating the Fed will halt its rate-hiking cycle soon.

A flattening curve is also indicative of slowing economic growth, a period which is traditionally bad for equities but good for bond investors.

In theory, the Fed could reduce interest rates if the economy weakens, which would also boost bond prices.

Ms Chan doubts bond prices will rise much further in the near future, saying it is likely prices will trend sideways for the next year.

'People are expecting a little more rate hiking, but not that much,' she says. 'I think the bond price will be stable. At the moment, I would view the [ABF] fund more as an income-generating instrument. If you buy now, the income-generating receipts are higher than cash.'

The fund is currently trading at a yield discount against US dollar bonds, reflecting the market belief the Hong Kong dollar could benefit from a yuan revaluation.

'It is a strategic tool, a long-term investment rather than a one-off investment,' Ms Chan says.

At its current yield, and a coupon paid every six months, Ms Chan says the fund is likely to appeal to investors who would otherwise have been attracted to guaranteed funds.

She forecasts a benign inflation environment ahead, with a moderate rise in consumer prices that should remain contained.

'What we are forecasting is a pickup in inflation, but in the range of 2 per cent,' she says.

She expects over time the bond fund's net asset value will exceed US$1 billion.

With the dollar's dramatic decline last year in mind, she says investors should look more seriously at the issue of matching their future liabilities with savings and investment denominated in the same currency.

Although the Hong Kong dollar peg to the greenback looks solid, she says investors who switch into Hong Kong denominated assets - such as the ABF - are eliminating future risk.

The ending of the dollar peg might seem unlikely in the current environment, but history shows attitudes towards the value of different paper currencies can change dramatically.

'You don't know what could happen to the currency in the future,' she says.