Merrill Lynch China Participation Certificates
Yesterday night, I attended a talk organised by Merrill Lynch on one of their latest products, China Participation Certificates. According to the information on the brochures, the Certificates are a cost effective way for investors to obtain access to selected China-themed sectors, based on the research of specialised Merrill Lynch analysts.
The session begun with a presentation by Mark Matthews, a strategist at Merrill Lynch. Mark’s presentation was on the outlook for China. His views on China were very positive, with some of the following reasons given:
- High growth rate
- Urbanization still has years to run
- Growth in fixed investments and exports
- Accelerating consumption
- Increasing domestic liquidity due to export earnings
- Strength of Reminbi will keep CPI down
Well, I certainly wasn’t expecting a negative outlook given that the objective of the seminar was to promote their China Certificates. 🙂
The next speaker after Mark was another Mark, Mark Wang. He’s the director of the financial products group in Merrill Lynch. Mark gave the overview on how the certificates are created.
Using Merrill Lynch research, specific China themes are selected and SGD indices will be created based on them. The corresponding Certificates which track those indices will then be created, placed out to investors and traded on SGX.
According to Mark, investors are often overwhelmed with an ocean of financial information and it is quite difficult for them to choose the correct sector to invest in. They are also increasingly looking for securitized investment ideas.
Using Merrill Lynch’s Certificates, investors can now get access to top-notch research ideas. These are the sectors that have been selected by Merrill Lynch and their reasons for doing so:
China Water
- Global population growth and increased demand for water supply
- China has the world’s largest population
- As water resources become scarce, the value of water will rise
- Beneficiaries will be companies which collect water from end users, operate in affluent regions with relatively high returns, and specialise in water conservation/purification with marketable products or technologies
China Brands
- Major consumption boom coming
- Rising middle class and Generation Y will propel demand for branded goods
- Increasingly homogeneous market
H-Shares Discount
- Constructed based on the stocks likely to benefit from a growth in the China economy
- H-shares trading at a discount to their corresponding A-shares are purchased
S-Shares
- Constructed based on the stocks likely to benefit from a growth in the China economy and listed on Singapore Exchange
The last speaker of the session was Wong Kok Fai, the director of Merrill Lynch’s equity structured solutions. Kok Fai gave us a more detailed explanation on how the Certificates were supposed to work.
The Certificates are listed securities with 100% exposure to the underlying index. They are Bermudan style warrants (early exercise option available) with a zero exercise price and 1-1 conversion ratio. As such, they have zero gearing and no time decay factor.
With a three year expiry date, they are meant as medium to long term investments.
There is a passive management style as they simply track the index. The annual management fee is 1% and all the dividends paid out by the stocks are also paid to the fund managers.
Even though the Certificates has an early exercise option, most of the retail investors will probably not need to use that option as they can just sell them on the market. Merrill Lynch will be the market maker and provide accurate quotes for the prices.
And with that, the session ended with everyone rushing for the refreshments. Even the originally scheduled Q & A session was cancelled and we were told it would be held outside informally.
My take on this product?
I find the 1% + dividend payout as fees a bit on the high side for a ETF sort of product. This makes it unattractive to me.
However, if someone wants to invest in China via unit trusts, this might be a viable alternative.
Before I left, I interviewed one of the other attendees Jackson on his views about the session and this is what he had to say:
“The food was alright, and the water-melon was quite sweet. But everyone seemed to be rushing to queue for the food.“
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