This Luxemburg Sicav takes a two-pronged approach to generating growth from Chinese equities. It combines an actively managed portfolio of Chinese equities selected by China Asset Management with a derivatives strategy run by Commerzbank that reduces exposure to volatile markets, while allowing full market exposure in rising markets.
The equity part of the fund will invest 30 to 60 of China Asset Mangement’s best ideas. It will invest in firms of all sizes that are selected on the basis of top-down and bottom-up research within a universe of around 2,400 stocks. A strict sell discipline ensures that any deterioration in growth prospects and the management team will result in those stocks being sold a replaced by better ones. An indication that stocks are becoming overvalued is also likely to trigger a sale.
The derivatives strategy may come into play following the weekly measurement of the fund’s 20-day actual volatility compared with the fund’s target level of 20 per cent. Commerzbank says that volatility above this level signals a falling equity market, so it will respond by taking a short futures position on the Hang Seng China Enterprise index or Hang Seng index. This hedges against market falls so that the impact of market falls on the overall fund is reduced.
If the actual volatility of the fund is lower than the 20 per cent target a long index futures position is taken to adjust the expected volatility to the target level and maintain full exposure to the market. If volatility is at the target level, then investors have exposure only to the equity portfolio managed by China Asset Management.
The Chinese growth story is well known but the region can be highly volatile. This fund’s derivatives strategy can help to manage volatility so that investors are not fully exposed to the ups and downs of investing purely in equities. An experienced domestic Chinese manager may also appeal to investors but some may find the derivatives strategy too complicated.