- What are emerging market funds and BIRC funds?
Emerging markets refer to financial markets in developing economies, where economic and political conditions may be more volatile. BRIC is the acronym for four emerging markets: Brazil, Russia, India and China.
Investors must not judge a fund simply by its short-term performance. Unsustainable surge might indicate economic overheating. Assess the long-term growth potential of the investments of a fund. Always remember that past performance is not indicative of future performance.
Investments in emerging market funds may offer high return potential, but are more risky due to the markets' relatively unstable political environment, currency fluctuation and other risks. They are only suitable for investors who are willing to accept very high risk.
- What are "Class B" funds?
The concept of "Class B" funds is derived from the US to distinguish funds of different fee structures (commonly referred to as the "load").
Under this concept, traditional funds are called "Class A" funds, which charge investors a few percentages of subscription fee upon their purchase, i.e. they are front-end load funds.
On the other hand, "Class B" funds are back-end load investments which require no upfront subscription fee. Thus, investors buying a Class B fund have 100% of their capital invested in the fund. However, they are charged a fee upon their redemption of that fund.
The redemption fee payable by Class B fund holders decline with the time they hold the funds. For instance, the redemption fee may start, say, from 4% in the 1st year and then down to 1% in the 4th year with an annual decrement of 1%. So, usually, the longer investors hold the Class B fund, the lower the redemption fee they have to bear. Investors may not even have to pay any load if they redeem their holdings after having been in the fund for over 4 years.
In calculating the redemption fee, some Class B funds can either use the subscription Net Asset Value (NAV), or the current NAV, whichever is the lower, as the base for computation. Compared with the more common approach that solely considers current NAV in the calculation, the alternative method would enable investors to pay lower costs.
However, investors should note that load is not the same as management fee, which is applicable for both Class A and Class B funds.
- Why can I buy a fund at different prices from different distribution agents?
Currently, a unit trust or mutual fund may quote a net asset value (NAV) price, or quote bid and offer prices. Offer price is the price you pay to buy units/shares in a fund, while bid price is the price you get on redeeming each unit/share. Generally, the offer price includes the current net asset value of the fund plus any front-load fee. The front-load fee is akin to a sales commission charged by the fund manager which may be reimbursed in whole or in part to its distribution agents.
A fund that is sold via different distribution agents may be subject to a different level of front-load fee depending on the business arrangement between the fund manager and distribution agents. Therefore, investors subscribing via different distribution agents may be paying a different offer price.
For instance, the offer price of a fund with a NAV price of $10 and a 5% front-load fee is $10.50. If a distribution agent offers its client to subscribe at a reduced 3% front-load, then the offer price will be $10.30. Suppose another distributor offers a 80% discount off the front-load, meaning that the initial charge is only 1%, then the offer price will be at $10.10.
- What is dollar cost averaging in fund investment?
Dollar cost averaging means buying units in a fund periodically with a fixed sum, regardless of the condition of the markets of the fund's underlying investments. For instance, you join a monthly savings plan offered by an intermediary and contribute a fixed amount monthly to buy units of a designated fund.
With this strategy, you may buy low or high. When the unit price rises, fewer units are purchased for the given amount of money. Conversely, more units are purchased for the fixed amount when the unit price drops. Normally, dividends distributed by the fund are reinvested to become part of your dollar cost averaging portfolio.
Advocates of this approach of fund investing believe that the impacts of the market's up-and-down swings on investors are reduced. Moreover, in this way, investors do not have to time the market to make their subscriptions.
Using a numerical example to illustrate how dollar cost averaging works, assume your monthly contribution to a fund is $3,000 and the unit price of the fund on the first dealing day is $5; then, you can purchase 600 units. As the market surges, the unit price rises to $7.5 on the next dealing day. Therefore, the given amount of $3,000 can purchase 400 units only. Subsequently, the market suddenly falls, the unit price declines to HK$6 on the third dealing day and you can buy 500 units.
In this illustration, the average unit price is $6 (total contribution = $9,000 / number of units purchased = 1,500), which effectively is the breakeven point of your investment. On the contrary, if you had invested all $9,000 in one go on the second dealing day at $7.5 per unit, then, you would have only got 1,200 units. Besides, compared to the market price of $6 on the third dealing day, you would have seen a 20% fall in the value of your portfolio (1,200 units x $6 = $7,200 against the original stake of $9,000).
- Do investors pay the same fee for funds purchased through different channels?
Funds are usually sold in two ways. One is by direct selling by the fund houses. In this case, fund houses open accounts directly with the retail investors. The other way is for banks, investment advisers or brokerage firms acting as intermediaries to promote the products to investors and then refer the deals to the fund houses. Fund houses, investment advisory companies and brokerages have to be licensed by the SFC before they can market funds. Banks should register with the SFC as "Registered Institutions". But their securities businesses (including funds) are regulated by the Hong Kong Monetary Authority.
Disregarding whether funds are purchased through a fund house or an investment adviser, investors generally have to pay a front-load. If the unit price of a fund is quoted in term of net asset value (NAV) per unit, investors have to pay a front-load on top of the NAV. Fund houses generally deduct the front-load from the investment capital before issuing units. If a fund is quoted with bid and offer prices, the front-load is reflected in the price spread.
A fund usually sets a maximum percentage on its front-load. The fee structure and charges of a fund are found in the offering documents. For the sake of business promotion or other commercial considerations, fund houses may rebate part of the fees to the intermediaries in the sale process, and banks or investment advisers can therefore provide discounts on the front-load charged to investors. Nevertheless, discounts are not only offered by intermediaries, fund houses sometimes also offer similar discounts to institutional investors or even their retail investors for attracting subscriptions.
- Can units in a fund be registered in an investor's own name?
Generally speaking, fund units purchased by an investor can be registered directly in his own name or under the name of a nominee.
An investor who chooses to register the fund units in his name should make his cheques payable to the fund house or the trustee of the fund. Similarly, if payments are made by means of telegraphic transfers, they should be credited directly into the bank account of the fund house or the trustee of the fund. In such cases, the investment advisor that provides investment advice only acts as a middleman in the deal, and should not be allowed to hold any assets of the investor. As the investor can establish a direct relationship with the fund house, he can receive information such as account statements, annual reports and interim reports from the fund house or trustee regularly to have a better understanding of his investment.
If an investor chooses to buy the fund through a nominee account, his payment will be made to a nominee company independent of the investment advisor. Although the opening of a nominee account saves a lot of time and administrative chores, the SFC does not directly regulate the operation of the nominee, and the legal actions that can be taken by the SFC on this type of companies are limited. Under such an arrangement, although the investor is the beneficial owner of the fund units, he is not the legal owner and as such, the fund house does not have to be legally responsible to him. Furthermore, the investor may have to pay additional handling charges for opening or closing the nominee account. Investors therefore should only hold his fund units through a nominee after careful consideration.
- Is a discretionary account necessary when buying funds?
A collective investment fund, represents a pool of money from a group of investor, entrusted to investment professionals for management. An investor's interest will be represented by the units/shares of the fund that he holds. The investor will not be able to, for example, negotiate the level of management fee charged by the fund. He will need to read the offering document of the fund and decide if the level of fees charged is acceptable to him. The offering document of the fund contains the terms of investment and, by signing the application form, the investor indicates that he agrees with the terms therein. An investor can "terminate" the contract by selling his shares or units of the fund.
A fund investor does not necessarily have to open a discretionary account. In fact, whether an investor requires this service depends on individual investment needs. Holders of discretionary accounts usually rely heavily on the professional expertise of their broker or investment adviser in managing their investments, and give them rights to trade on their account without first obtaining their instructions.
- Does a guaranteed fund always have a fixed investment period/maturity date?
Most guaranteed funds have fixed terms. By design, guaranteed funds typically contain a structure whereby a guaranteed amount will be paid to investors who hold shares/units in the fund at a specified date in the future (usually the maturity date). You can obtain the guaranteed amount when you fulfill the guarantee conditions, such as holding the fund to maturity. Units redeemed before the maturity date will not be protected by the guarantee, and may be redeemed at a price, which is less than the initial capital outlay.
However, some guaranteed funds have certain conditions, which can trigger the funds to be terminated before their maturity. Such funds are generally called variable maturity guaranteed funds. These funds usually have a variable investment period whereby the funds may be terminated earlier subject to certain criteria being achieved. In assessing the likelihood of early maturity, investors should have regard to the easiness or difficulty of fulfilling the prescribed criteria for early termination. All in all, investors should conservatively view the variable maturity guaranteed fund as a medium to long term investment with the maximum maturity term.
In most cases, conditions are attached to guaranteed funds which, if unfulfilled, would void or vary the guarantees. You are advised to study these conditions carefully before committing yourself.
- What are the risks relating to Mainland capital gains tax that I should consider when investing in a fund with exposure to Mainland securities?
There are risks and uncertainties concerning the application of the Mainland capital gains tax ("CGT") regime on investments by foreign investors (including non-Mainland domiciled investment funds, QFIIs and RQFIIs) in Mainland securities, and such tax is not currently enforced.
It is a matter of professional and commercial judgement on the part of each fund manager, acting in the best interest of investors after taking professional tax advice, to consider and decide whether to make provision (and if so, the extent and provisioning policy) for the fund’s potential CGT liability or to change the fund’s existing CGT provisioning policy from time to time.
Depending on the tax advice obtained and other relevant factors, each fund's tax provisioning policy may be different. There may be funds without making any CGT provision at all. Even if a fund makes CGT provision, such provision may be excessive or inadequate. The Mainland tax rules and policies are subject to changes. There are risks that CGT may be enforced by the Mainland tax authorities and that such enforcement may be on a retrospective basis. If and when CGT is collected by the Mainland tax authorities, any shortfall between the provisions (if any) and actual tax liabilities will have to be paid out of the fund's assets and could have a material adverse impact on the fund's net asset value (NAV), whereby causing significant losses to investors.
Enforcement of the CGT by the Mainland tax authorities and/or change in tax provisioning policy by a fund manager will impact investors remaining in the fund. Investors who have sold/redeemed their interests prior to such enforcement and/or change will not be impacted. Likewise, such investors will not benefit from any release of tax provisions back into the fund.
Investors may be advantaged or disadvantaged depending upon whether and how the CGT will ultimately be taxed and when the investors invest in the fund. Investors should carefully read the CGT provisioning policy of a fund (which may have substantial exposure to Mainland securities whether through RQFII, QFII or other Mainland market access derivative products) and the associated risks as disclosed in the offering documents before investing in the fund. If in doubt, they should consult their professional advisors.
- What is FATCA and the impact on investment funds and their investors?
Under the US Foreign Account Tax Compliance Act (FATCA), a foreign financial institution (FFI) is required to report to the US Internal Revenue Service (IRS) certain information on the US persons that hold accounts with that FFI outside the US, and to obtain their consent to the FFI passing that information to the IRS.
An FFI which does not comply with the requirements with the IRS in respect of FATCA and/or who is not otherwise exempt from doing so will face a 30% withholding payment on certain US sourced income (including interest and dividends) made on or after 1 July 2014, and gross proceeds from the sale or other disposal of property that can produce US sourced income starting from 1 January 2017.
Under existing regulations, certain other payments referred to as “foreign passthru payments” (term is not yet defined) may also become subject to withholding under FATCA no earlier than 1 January, 2017. It is expected that the IRS will issue further regulations in this respect.
Impact on investment funds and their investors
If an investment fund becomes subject to a withholding payment as a result of FATCA, the net asset value of the fund may be adversely affected and the fund and its investors may suffer material loss.
Investors should refer to the offering documents of the fund to obtain further information on the FATCA status of the fund and the associated risks relating to FATCA. If in any doubt about FATCA, investors should seek appropriate professional advice as soon as possible.
Further information on FATCA