HK firms create 'non-mainstream' China mutual fund

An independent financial advisory firm has joined forces with a fund management team in Hong Kong to launch an open-ended mutual fund for retail investors to tap into China’s economic growth.

Although there are more than 100 China-focused mutual funds in the Hong Kong market, the financial adviser, Convoy Asset Management, claims that this is a fund with a difference.

“Most of these China funds have picked constituent stocks of the MSCI China Index, with the top 10 holdings of some funds almost identical to the top 10 stocks on the index,” notes Alan Ng, Convoy’s head of business development. “But the constituent stocks of the MSCI China Index may not optimally reflect the actual economic growth potential in China.”

He points out that, over the past 18 years, the MSCI China index has fallen about 37%, while China’s economy has grown 11-fold during the same period.

As a result, Convoy has teamed up with Zeal Asset Management, a value-investing specialist firm set up in 2009 that focuses on Greater China, to act as marketer and distributor for its co-named Voyage Zelec China Fund. Zeal is run by CEO Franco Ngan and CIO Jacky Choi, both of whom previously helped to run Value Partners, one of Asia’s largest hedge funds.

Value investing involves bottom-up fundamental research designed to capture stocks with growth potential that appear undervalued on price-to-earnings and price-to-book multiples.

“We wanted to find a fund house that invests in China through its own research and doesn’t just read reports from investment banks,” says Ng. “Through company visits and on-site evaluation, Zeal will investigate quality ‘non-mainstream’ stocks that may be overlooked by the market.

“This is the first time we have co-branded with another company. Normally we only introduce clients to other funds, but we want to explore some new opportunities.”

Ng confirms Zeal plans to invest in about 35 to 50 stocks, 70% of which will be listed in Hong Kong. The remainder will be B-shares listed in Shenzhen and Shanghai with high growth potential.

The fund is set to be launched on September 20 following a two-week initial public offering period, when units are offered to the public for subscription at a fixed price per unit.

It aims to raise HK$100 million ($12.9 million) during the IPO, with the minimum subscription amount of HK$50,000. The subscription fee equates to a maximum of 5% of net asset value.

The fund will charge a management fee of 1.75% per year and a performance fee of 15% per year (high water mark). 

Convoy is also applying to the Hong Kong government for the fund to be authorised under the city’s Eligible Collective Investment Scheme. Foreign nationals who invest not less than HK$6.5 million will be eligible to apply for city residency under the broader Capital Investment Entrant Scheme.