Friday, March 23, 2007

Frustration with Funds (2)

I have previously written about the problems Hong Kong investors have with accessing funds which have no load and low MER (management expense ratios). The situation is improving and I summarise my current understanding as follows:

1. many fund houses will only offer actively managed funds. MERs are typically in the 2-3% range. While this is very high by US standards and has a material negative effect on returns, in part it is justified by the relatively small fund sizes;

2. most fund houses still try and charge 5-5.5% front end load. This can usually be negotiated down to 2% and "specials" of 1.5% have been seen. This is still outrageously high. I've managed to get one reasonably good fund house down to either 1% or 0.5% but it took a while to get there;

3. most of the overseas ETFs and no load index funds I have looked at are either not available to Hong Kong residents or the returns are subject to a withholding tax of up to 30%. As much as I hate paying the front end load and the high MER, because of the withholding tax issue, I think I am marginally better off over the longer term paying the load and MER than going with an overseas no load index fund. This conclusion is not an absolute one - the result depends on what the actual return on the funds is and does vary a bit with the actual MER, the actual load and the time period of the investment;

4. there is a small range of ETFs listed on the Hong Kong stock market. Of these, only the ones which track the Hange Seng Index (TraHK), the FTSE/Xinhua A50 Index, the Hang Seng China Enterprises Index and the BSE Sensitivity Index have enough liquidity for me to feel comfortable investing in. I hold TraHK, but do not hold either of the two China related funds or the India fund. The latter is one that I only recently became aware of. There are also ETFs which track other China indices, the MSCI Korea Index, the MSCI Taiwan Index, a Hong Kong bond index and a pan Asia bond index. However, these ETFs have either no or inadequate trading volume making them inaccessible. Lyxor (part of the SocGen group) has announced that it intends to list other ETFs in the near future and, if there is enough trading volume, I look forward to that;

5. there is one hedge fund available: the AHL Managed Futures Fund. This has no load but a high MER (including profit share). I do not hold this fund. Based on past performance, a decision to invest would have done reasonably well;

6. there are some REITs listed in Hong Kong, but I am not allowed to invest in these.

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