Monday, July 23, 2007

Two New China A-share ETFs Launched in Hong Kong

Two new China A-share related ETFs listed in HK last week, they are:

HSBC Dragon Fund (0820.HK)
An actively managed closed end China concept fund with up to 50% of portfolio invests in A share, remaining 50% in H-share, Red chip or B share. Fund NAV is updated daily here

Profile of manager extracted from prospectus:

Richard Wong
Richard is a fund manager in the Asia ex Japan equity team. He has overall responsibility for investments in the Chinese equity market. Richard has been working in the industry since 1985. He first joined HSBC Investments in 1993, then left to work for Nikko Capital Management as a senior portfolio manager for one and a half years. Richard returned to HSBC in 1997 and moved to Halbis upon its establishment in 2005. Richard started his career at Moody’s Investors Service as a research associate in New York. Richard holds a BA in Economics and Computer Science from Columbia University and an MBA in Finance from New York University.

BOCI-Prudential W.I.S.E. - CSI 300 China Tracker (2827.HK)
which tracks the CSI300 index. The index consists of the largest 300 A-share companies traded in Shanghai and Shenzhen stock exchanges. Fund NAV is updated twice daily here.

Apart from a wider coverage than the A-50 index (which can be good or bad), significance of the CSI 300 index is that it is being chosen as the underlying index for the coming China index future which is yet to be launched.

Market reacted very favourably to the HSBC Dragon Fund, in fact is truly alarming to me. Today is the 2nd day of listing and it’s trading at ~70% premium to NAV. As this is a new CEF 100% of its assets is in fact cash.

CSI 300 Tracker is trading comparatively ‘humble’ with 13% premium.

When we look at other similar funds, Morgan Stanley China A-share Fund (CAF) is trading at ~15% discount. A-50 China Tracker (2823.HK) trades at ~1.7% premium.

So practically people are anticipating the HSBC manager will beat the China market by at least 70% !

Not sure whether I am too stupid and not able to understand the secret rationale for paying $170 cash for $100 cash + a remote wish. I’ve NOT seen any active China fund which can beat the already very high growth A-share market index by extra 70%!

OK, let’s look at history and check on historical 12-month premium of some other popular emerging market ETFs.

Here I listed several of them which I’ve been closely following:

Morgan Stanley China A Share Fund (CAF)

Templeton Russia & East European Fund (TRF)

India Fund (IFN)

Morgan Stanley India Investment Fund (IIF)

As can be seen from those charts, most of the emerging market funds had their premium reached a peak around Dec 2006 timeframe. The highest premium was 38% with Templeton Russia & East European Fund (TRF) and that for Morgan Stanley China A Share Fund (CAF) was ~16%.

This new HSBC Dragon Fund (0820.HK) for sure has broken a lot of ETF records and I wish all those who invested in this ETF good luck and have their wishes come true. On the other hand, the HSBC manager can in fact consider buying CAF at its current 15% discount to lock in some immediate returns.

Will I buy the CSI300 tracker? No, I would rather stick with A-50. I am only interested in those true market industry leaders listed in Shanghai. For those smaller companies (in CSI300) listed in Shenzhen, my gut feeling is that the return/risk ratio will not be as good as A-50. Besides, I am not going to pay 13% premium with CSI300 Tracker when I can pay 1.7% for higher quality stocks (with A50), this is apple-to-apple comparison as both are listed in HK versus CAF which is listed in US and investors there are trading the ETF at a discount instead of premium.

Today I've opened a new LONG position in a HSCEI index linked derivative, with the interest hike and interest tax reduction announced last Friday, I believe it will be another few months of bull market before the next significant correction. Near term risk is the coming launch of the China Index Future, the exact plan is still unknown and that's the policy risk we are taking.