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The new fund from OSK-UOB launched on September 18 seems to be offering all the “good stuff”. Highlights include:

 

– it’s capital guaranteed

– 1st Malaysia mutual fund company to offer investors exposure to the high growth emerging markets of Brazil, Russia, India and China (hence the name “BRIC” )

– expected returns of 10% per annum (CEO of OSK-UOB is quoted in the Star…so this gives credibility. I hope he is a man of his words!)

 

All this is promised by the Capital Guarantee BRIC Fund

 

What it invests in:

 – 90% in three-year zero-coupon negotiable instruments of deposit to secure the guaranteed value

 – balance in three-year over-the-counter Monthly Asian Style Call Options issued on DWS Invest BRIC Plus Fund, an investment scheme under the Germany-based fund manager, Deutsche Asset Management. 

 

Structurally, this fund is similar to another fund which I reviewed earlier, the CIMB All-Stars Global Structured Deposit which is also capital guaranteed and invests the non-fixed income portion in call options of 20 global blue-chip stocks. Maybank’s CORE Capital Guarantee fund which invests 90% in fixed income securities and the balance in equity options, REITs and commodities is also somewhat similar except that REITs and commodities are thrown into the mix.

 

If you read the comments posted by readers for the Maybank fund, you will note that there are skeptics out there who doubt the ability of such structured products to deliver on their promised returns.

 

Let’s do some maths and check out how an annual return of 10% can be achieved – assuming 90% of the Capital Guarantee BRIC fund will give a return of 5%, what is the return that must be generated from the balance that is invested in options in order to get our desired return of 10%?

 

The answer is 60% (see table below):

                

                        Return %

Alloc        Y1            Y2            Y3            Ave

90%             5              5              5         

8%             60            60            60       

2%              0            60            60       

Wtd Ave   9.3          10.5         10.5            10.1

 

(Y1 is lower because of the initial sales charge of approx 2%)

 

Now is this 60% achievable?

 

This is what the Wall Street Journal has to say about BRICs: “BRICs returns have been eye-popping: while the Morgan Stanley emerging-market index is up 171% since the end of 2002, Morgan Stanley’s BRIC index has surged 262%.” (source: The Big Picture)  This gives an average return of approx 87% per annum for the last 3 years.

And don’t forget also that the call options are a form of leverage. They magnify risk and reward compared to a direct purchase of the underlying stock. So if you had purchased BRIC call options over the last 3 years, the annual returns would certainly have surpassed 87%.

 

OK that’s the maths out of the way (phew!)

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Of course when something sounds good, the immediate reaction is to dig deeper for any “fishy” bits. I visited UOB’s website to take a look at the fees. Here they are:

Service Charge – 2.04% of Net Asset Value

 

Redemption Charge

1st Year                        1.5%

2nd Year                        1.2%

3rd Year                        0.9%

On Maturity                      nil

 

Annual Management Fee – 0.75% on Net Asset Value of the Fund

Annual Trustee Fee – 0.05% based on NAV (min RM18,000 per annum)

Fees appear reasonable too. 

 

Verdict:  If you are prepared to stay locked in for 3 years, and don’t have a problem with human rights track record of Russia and China then to me this is a pretty interesting investment option.

 

Other information:

 

The new fund has an initial approved size of 500 million units priced at RM1 per unit. The minimum initial investment is RM5,000. 

 

This fund is suitable for investors who seek capital preservation; want to participate in the potential of the fastest growing emerging markets in the world, particularly the BRIC countries i.e.Brazil, Russia, India and China; wish to diversify their portfolio from other asset classes like fixed deposits or bonds to enhance overall performance; and have a very low risk tolerance.  (source: UOB website)

 

Hmmm….interesting how “low” risk tolerance can be associated with emerging markets. Quite innovative, wouldn’t you say?

 

For a more balanced view, you should the economist, Stephen S Roach’s piece Hitting a BRIC wall? which provides excellent insight into the fundamentals of the BRIC economies and also the Reuters article Cracks appear in the big four emerging markets which explains why Brazil and Russia have become the weak link in the BRIC equation causing “cracks” to appear.

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