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Two funds, two views of post-QE era

One offers the usual income theme, the other access to mainland equities trading cheap

PUBLISHED : Monday, 08 July, 2013, 12:00am
UPDATED : Monday, 08 July, 2013, 2:31am

Two funds launched recently. One picked up the tried-and-tested income theme. The other offered access to mainland equities smack in the middle of a big sell-off.

Although the mainland stock fund had unlucky timing, it is arguably the more forward looking of the two.

It is also, arguably, the one that is better positioned in this new, Fed-tapering era.

The two funds test two different zones of risk appetite.

The JP Morgan Asia Equity Dividend Fund seeks to generate yield in the range of 5 to 5.5 per cent, according to Jeffrey Roskell, a JP Morgan fund manager. It will do this with a focus on high-dividend stocks, particularly real estate investment trusts.

Income funds have done well in the aftermath of the global financial crisis as interest rates have been held at a generational low.

Investors have been spurning risk but have been keen for yield with a particular eye on Hong Kong's high inflation.

Equity dividend funds, a subset of the income theme, have been particularly popular in that regard.

But perhaps more intriguing to investors is the Bank of China's All Weather HK & China Equity Fund.

The fund will invest at least 70 per cent of its cash in Hong Kong-listed stocks, and has the option to invest up to 30 per cent of capital in mainland-listed stocks, or A shares.

It is the mainland equities option that will attract investors' attention.

The mainland stock market has recently been a sinkhole. The Shanghai Composite Index fell 13 per cent last month following a sharp increase in interbank interest rates and amid growing fears of an economic hard landing on the mainland.

It was in the context of that sell-off that the Bank of China launched its fund.

"Some people might think that this is the worst time to launch a fund, but in my opinion, in terms of valuation, it is the best timing for us," says Au King-lun, the chief executive of BOCHK Asset Management, putting the best possible spin on matters.

Au has grounds for saying the mainland stock market is cheap. The Shanghai market trades at a price-earnings ratio of 10.8 times, about one-third of its historic average.

"There are still investors who are positive on China and think the market has been pricing in much of the risk of an economic hard landing," says the head of advisory at a local private bank.

Moreover, consider the interest rate cycle. The United States Federal Reserve has all but made official its intention to wind up the current round of quantitative easing, signalling an impending era of rising interest rates in the US and Hong Kong.

Conventional wisdom says rising interest rates will devalue income-focused securities, such as bonds and dividend stocks, but will favour growth securities, such as A shares.

The two funds present a clear choice.

If an investor chooses JP Morgan's dividend fund, they are staying on the well-trod path followed by investors for a number of years now, of seeking conservative returns with a good shot at beating the rate of inflation.

Alternately, investors could buy the BOC fund and take a lot more risk, and hope for much higher returns.

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