Malaysia-based CIMB-Principal launches a structured fund in the hopes that Chinese stocks will bottom out in the next six months
New structured product issuance has fallen off a cliff since the collapse of Lehman Brothers sparked protests by disgruntled retail investors in Hong Kong and Singapore last year, but Malaysian investors, who escaped the worst losses, still have appetite for new products.
Tapping into this demand, CIMB-Principal has started marketing a five-year structured fund that offers punters the opportunity to profit from a recovery in Chinese stocks. Investors who buy the product are, in effect, making a bet that H-shares are going to bottom out within the next six months and will rise consistently for the subsequent life of the product.
Malaysian structured product investors have fared better than their counterparts elsewhere in Asia because the market there is far more conservative—most products offer modest yields and principal protection, and are launched in fund or deposit form. This latest offering is no exception.
The fund is linked to CIMB's index of H-shares—the Isovol China Index—and is aimed at conservative investors who want to beat the one-year fixed deposit rate, which stands at 2.5% today.
Investors are principal protected at maturity and, in return for that protection, they get limited participation in the underlying strategy: a minimum of 40%, plus a small, conditional booster.
At the end of the first half-year, the strategy looks back at the level of the index at the end of each of the first six months and picks the lowest point as the entry level for investors—and their annual performance is then benchmarked against that level for the next five years.
So, if the index is up 10% from the floor level at the end of the first year, investors get a 4.2% return that year (assuming a 0.2% booster if, for example, the floor price is 10% below the initial price).
In effect, the closing level at the end of year one becomes the new floor and investors only get returns in year two if the index rises above that level. And so on for years three to five.
In other words, the best-case outcome is that the index plummets during the first six months and rises steadily for the subsequent four-and-a-half years. If it rises by an extra 10% each year, over a floor of 90, investors will continue to get paid their 4.2% a year.
The bearish example in the prospectus posits a modest rise in year one (again over a floor of 90) followed by a steady decline, which produces a weak 0.45% annual return. But the index performance does not need to be that poor to show weaker results than sticking your money on deposit—an additional 5% rise each year, from a floor of 90, will obviously pay out half as much as a consistent 10% rise, or just 2.1% a year.
As its name suggests, the China Recovery Structured Fund depends on a fairly bullish outlook to deliver worthwhile returns.
The fund is on offer until June 3 and is expected to launch on June 12, subject to a minimum subscription of M$50 million ($14 million). The application fee is 1.5% and the fund is being distributed by CIMB through its retail and private banking outlets.