Hang Seng BeES — Chance to buy into China

Credited with being the first foreign ETF in the country, Hang Seng BeES is the latest offering from Benchmark Asset Management Company. An open-ended index scheme, the Hang Seng BeES aims to provide its investors with returns (before expenses) that closely correspond to the total returns of securities as represented by the Hang Seng Index.

The fund will track the index on a real-time basis and will be passively managed. That is, the AMC will not try to ‘beat' the market or seek temporary defensive positions when the market declines or appears over-valued.

Hang Seng exposure

The ETF will enable Indian investors to buy into China, the world's largest manufacturing economy. It will invest at least 90 per cent of its total assets in the stocks of its underlying index, in the same proportion as that in the index. The Hang Seng Index comprises 42 stocks, representing about 60 per cent of the total market capitalisation of the Hong Kong stock market.

The index has a 37 per cent representation from of H-Share companies (those incorporated in mainland China and listed in Hong Kong) and little under 17 per cent from the Red Chips companies (incorporated outside mainland China but controlled by mainland entities and with at least 50 per cent share of sales revenue or profits or assets from mainland China); while the remaining are HK Ordinary shares.

Among the well-known index constituents are companies such as HSBC Holdings, China Mobile, Bank of China, Petro China and Tencent Holdings.

Comment

While reams have been written about the investment attractiveness of Chinese equities, Hang Seng BeES may not fit the investment needs of all categories of investors. It may be best suited to such investors who fully understand, and have the time and resources to track, the fundamentals of the Chinese market and economy.

Unlike the actively managed domestic fund offerings that provide exposure to Chinese equities, the ETF will passively mimic the Hang Seng Index in returns. Besides, its equity exposure will be limited to the Hang Seng Index, unlike the existing fund offerings that can invest outside of the index as well as in Greater China shares.

For instance, while Fortis China-India Fund, the only fund in the pack with at least a year's existence, invests directly in Chinese equities (overall exposure limited to 35 per cent), others such as JP Morgan JF Greater China Equity Offshore Fund and Mirae Asset China Advantage Fund offer China exposure through the feeder funds route. The ETF may, therefore, offer a good fit only for investors looking specifically for Hang Seng Index exposure.

However, to its advantage, exposure to the Hang Seng Index would offer a better proposition to dividend-seeking investors. The index enjoys a higher dividend yield (about 3.25 per cent, as on January 29, 2010), compared to the little over one per cent yield of the domestic bellwether index.

Investors may also have little to worry about the scope of ‘tracking error' as the fund house has an impressive score on that front; at least as far as its existing fund offerings are concerned. Nonetheless, investors may have to build currency risk into their returns expectation.

As for those simply looking to enhance returns, Hang Seng BeES may have little to offer, though it boasts of an exposure to the world's fastest growing economy. Domestic equities offer a better bet in comparison. For instance, the CNX Nifty outperformed the Hang Seng Index each year in the last five years, save for the 2008 correction when it lagged by a couple of percentage points. Last year too, the Hang Seng Index advanced only 52 per cent, as against Nifty's 76 per cent.