Emerging markets the new flavour for QDII investors

Bank of China has launched its third QDII product, a fund of funds that will invest up to 70% of its portfolio in three emerging market funds. Around 40% will be invested in the Morgan Stanley Emerging Market Fund and Franklin TempletonÆs BRIC Fund, while 30% will be invested in the First State China Concept Fund. The balance will be invested in one- to 10-year US Treasury bonds.

This fund of funds is a departure from the investment products that have been typically available to the QDII market û low risk, blend return fixed income and structured products. It has a maximum equities exposure of 75%, higher than the 50% cap on equities in the bankÆs previous products. It is the first product from the bank to be denominated in renminbi and is expected to appease concerns over currency risk from US dollar exposure.

Bank of China previously launched a bond fund and a stable growth fund, which had 50% exposure to overseas-listed Chinese companies and 50% exposure to the Lehman Aggregate Bond Index. Those earlier models did not take off because of the negative real returns those funds provided amid a bull run in the China A-share market and amid expectations of an appreciating renminbi. The lack of appeal was also due in part to their hefty minimum initial investment requirement of RMB300,000 ($39,900).

Hu Kun, an investment manager at Bank of China in Beijing, says products like the fund of funds will likely set the tone for future QDII launches. Such products are easier to market to investors because the underlying investments are existing and have working trading platforms overseas.

ôDevelopments in QDII [products] are largely driven by demand,ö says Hu.

Potential return is a top priority among investors in China. ôWhen people look for overseas opportunities, they aim for return at from 10% minimum,ö Hu says, noting thatÆs what the investors usually need to recover their cost of capital.

Other considerations include the fundÆs transparency, size, and track record.

Bank of China established itself in Hong Kong earlier than most other mainland financial institutions, and thatÆs what it counts among its advantages in its efforts to gain more ground in the QDII market.

ôWe might not be the biggest bank in China, but we do have the biggest quota for QDII ($2.5 billion). The regulators trust us to have enough sense in investing overseas, as we have been doing it since the earliest days back to 1990s,ö says Wu Tianpeng, deputy general manager for Bank of ChinaÆs global markets department.

Bank of China plans to develop more products and continue working with international asset managers. Foreign houses have come forward to pitch their ideas, but they will need to meet the bankÆs requirements. The bank looks at size (asset under management should be at least $1 billion), ranking (must be in the top 5 league table) and flexibility (open architecture for redemption or lock-in period of less than three years). In addition to those basic requirements, the bank looks at the marketability and the investment story behind the product.