Commerzbank Corporates & Markets (C&M) has launched a Chinese equity fund through a joint venture with the Beijing-based China Asset Management (ChinaAMC).
Managed by Michael Wen and Edward Wang, the Commerzbank China Volatility fund is a Ucits compliant Luxembourg Sicav, and invests in 30-60 Chinese companies using an all capitalisation investment strategy.
The fund uses a mechanism to ensure the realised volatility within the portfolio is close to 20% to provide a better risk-adjusted return. To achieve this Commerzbank and ChinaAMC will weekly measure the realised volatility of the fund. If it is above the 20% target, Commerzbank will take a short future position in the Hang Seng (HSI) and Hang Seng China Enterprises (HSCEI) indices. If the volatility is below the 20% target, Commerzbank will enact a long position in the index.
“ChinaAMC are providing the alpha and Commerzbank the beta control,” says Steve Muzzlewhite, a member of the institutional fund solutions team.
He adds: “We did extensive analysis to come up with the 20% optimised target. Therefore, as an examble, if the volatility of the protfolio was under 20%, in addition to the actively managed portfolio there would also be a long position in the HSCEI of HSI Future.”
ChinaAMC was one of China’s first asset management groups and has $45 billion (£29 billion) of assets under management, 95% of which are China related. The firm uses an investment platform employing 140 analysts and fund managers, which Wen and Wang can use on the fund. (article continues below)
Haiyong Cheng, the head of equity investment and deputy chief investment officer at ChinaAMC, says: “As a stockmarket, China has developed beyond recognition over the past 15 years.
“However, Chinese markets are still inefficient, bound by high levels of regulation and less fluid information sharing. This creates anomalies in equity valuations that can only be picked up by investors who know the market well. Our process is designed to exploit China’s market inefficiencies – a key factor in our ability to outperform.”
Wang says that if China continues to grow at 7% for the next decade it will account for 18% of world GDP. However, he notes that whereas growth was driven by exports until 2003 and then in fixed interest, domestic consumption will play a more crucial role.
One theme Wang highlights as important is urbanisation. He says that by 2020 China will have 100 cities with populations over 3m, creating huge demand for transportation. He says railway-related firms can benefit from an investment boom in railway infrastructure.
The fund will mainly be invested in H-shares, although Muzzlewhite says it may later invest in A shares. The fund’s retail share class has a minimum investment of £1,000,
a 5% initial fee and a 1.75% annual management charge.