Lyxor Asset Management, a unit of French bank Société Générale, has launched a new guaranteed fund denominated in Australian dollars that is designed to tap into the performance of China’s A-share market.
The unusual move is an effort by the fund manager to offer investors an alternative platform to gain exposure to Chinese equities without risking capital depreciation through other currencies.
The fund has a three-year tenure and its performance is linked to the iShares FTSE/Xinhua A50 China Index exchange-traded fund (A50 ETF), while its guaranteed structure means investors will not lose their principal. The fund will invest at least 90% of its assets in a basket of Chinese blue chips and investors are guaranteed a 5% coupon at the end of the first year of their investment regardless of the performance of the fund, according to Lyxor, which manages €88.6 billion (US$114.9 billion) in assets. The subsequent two years will then depend on the performance of the A50 ETF.
“Investor demand for Australian dollars is increasing and it’s a currency that has many opportunities,” Derek Ng, head of distribution for Hong Kong structured funds and alternative investments at SocGen, said at a media briefing today. “This fund is suitable for investors who have a bullish view on the potential economic development in China [and who] seek to diversify their investment portfolio.”
Investors would obviously need to hold a bullish view on the Australian dollar to be tempted into this fund. SocGen was quick to explain its positive outlook on the currency, comparing it to gold because of its relative safety.
“Australia is the new gold,” said Glenn Maguire, chief Asia economist at SocGen. “In a world where investors are increasingly sovereign-risk averse, Australia’s budget deficit is being forecast to disappear in the next few years. The Australian dollar is an extremely safe asset class.”
The French bank also reckons now is a good time for investors to seek exposure to the Chinese equity market given that sentiment has been so poor, resulting in cheaper valuations. Chinese A-shares have been one of the region’s worst performing benchmarks in the past year, dropping close to a third in the past 12 months.
“The current levels of China A-shares are near their lowest valuations in 10 years,” Maguire added. “China is even cheaper than the Philippines now on a valuation basis.”
In addition, the growth outlook for China remains strong and is on course to become the biggest economy in the region and second-biggest in the world, overtaking Japan. China’s move to make the renminbi more flexible last month will also benefit A-shares over time, SocGen argued.
“The greatest show on earth is occurring in China,’ Maguire said. “As only a command economy can do, China has implemented the largest mobilisation of resources and capital in modern economic history.”
The offer period for the new fund is July 19 to August 13.