UBS, Schroders lead charge into privately placed RMB funds

Dec 1, 2010

Likely RMB appreciation and appealing A-share valuations have seen investors pile into RMB funds via private placement. UBS has “raised millions” for such a fund in a week.

A trend among international investors seeking exposure to renminbi appreciation and relatively low A-share valuations via private placements in RMB funds appears to be gathering steam.

Swiss bank UBS is set to close an RMB fund domiciled in the Cayman Islands, having raised “several hundred million dollars in just a week”, according to an industry insider.

Issuing RMB funds through private placement has become a key trend among asset managers in China after Haitong Securities launched the first RMB fixed-income fund in August this year.

The source discloses that Schroders also recently issued an RMB fixed-income fund through private placement in partnership with two banks (reportedly Merrill Lynch and UBS), and has raised $800 million.

Both UBS and Schroders declined to comment.

The UBS fund allocates 70% to fixed income and 30% to A-shares and is tailored to investors booking in Hong Kong, Singapore and Switzerland via private placement, says the source.

“Such a strategy is seeking to benefit from likely renminbi appreciation over the next few years as well as positive share price performance driven by earnings growth on the back of China’s surging economy,” he adds.

CSI 300 stocks are presently trading at 19 times price-to-earnings multiples, against a historical average of 25 times.

A fixed-income element would also temper A-share volatility, while seeking to benefit from relatively low bond yields (non-deliverable forwards can be regarded as an expensive hedging tool).

Asked whether the fund would be restricted by the limited supply of RMB bonds in the market, the source suggests UBS could seek to ramp up its offshore RMB bond exposure over the next six-to-12 months.

The fund’s A-share position has been built through UBS’s qualified foreign institutional investor (QFII) quota. According to the State Administration of Foreign Exchange website, by the end of the third quarter this year UBS Group had a total nominal QFII quota of $800 million approved. UBS Global Asset Management Singapore, meanwhile, has a $200 million quota approved.

HSBC is acting as the administrator, custodian and trustee of the UBS fund, while Simons & Simons is engaged as the law firm. The fund’s total expense ratio stands at 1.60%. UBS is distributing through its own wealth management business, alongside a large regional bank.