MQ IPO China Concentrated Core Fund

MQ IPO China Concentrated Core Fund employs a primarily quantitative investment strategy to help investors participate in IPO (initial public offering) investing ....

YT Kum, CFA 24.09.2007
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Investment Strategy
MQ IPO China Concentrated Core Fund employs a primarily quantitative investment strategy to help investors participate in IPO (initial public offering) investing. The Fund can invest in China-related IPOs across different markets, including Hong Kong, Singapore and United States.

MQ Rotational Strategy is the skeleton of the Fund's quantitative investment strategy. After the Fund purchases a basket of listed China-related IPOs on an equally weighted basis from a defined investment universe at inception, the Fund re-balances the portfolio when new target IPO appears. The Fund firstly removes the longest held position for new inclusions, making the portfolio always fresh. If th

e IPO allocation is scaled back, the Fund will purchase new target IPOs through the secondary market. The leveraging of the Fund could be up to 25 percent of its assets.

Portfolio and Strategy Analysis
In the recent bull-run, general Hong Kong investors regard IPO as a shortcut to profits, igniting an IPO heat. In the current torrent of IPOs, China-related IPOs are heated up with a sexy prospect of China economy. According to the data from Hong Kong Stock Exchange (HKEx), China-related IPOs accounted for 55 percent of the total number of new launches in 2005, providing a rosy backdrop for the launch of MQ IPO China Concentrated Core Fund.

Investors' high demand for IPO is unlikely satisfied given considerably great oversubscriptions and frequent launches. In this regard, with the help of economies of scale, the Fund may help investors to have better chance in winning the lucky draw of IPOs.

Despite that, the Fund's investment universe is confined to new IPOs under the Rotational Strategy, leaving small room for diversification. Chinese financials, for instance, accounted for more than 35 percent of assets as of August end 2007, under a strong flood of Chinese IPOs in banking last year. In other word, as the number of investment options is largely up to the total number of new China-related IPOs, the Fund's investment strategy is quite passive by nature. Moreover, weightings stocks are equalized on a systematic basis and no less frequently than semi-annually. Although this equal weightings strategy may be called ‘disciplined', it is also limited the extent of active management.

Investors should also acknowledge the risk in IPO investing, especially China-related IPOs. According to HKEx's data from 2002 to 2005, Mainland-related IPOs often made downside surprises in EPS compared with the forecast stated in prospectuses (down11 percent on average), while other non Mainland-related IPOs often made upside surprises in general (up 24% on average), leaving investors some concerns regarding their management quality.

If the number of new launches keeps surging, the Fund's turnover will increase inevitably, as it is compelled to buy and sell when new targets appear. At this point, the implications are twofold: 1.) Higher turnover means higher trading costs; 2.) The Fund does not focus on long-term investment horizon, implying that it may not earn long-term investors' vote. However, with a front-end load of around 5 percent, it seems short-term trades are not encouraged.

Aligning with the name of the Fund, the Fund's portfolio is pretty concentrated. As of August end, the Fund has 23 stocks in the portfolio with approximately equal weightings, which may add volatility to the Fund's performance given the high risk profiles of China-related stocks.

As "IPO funds" are still quite new in the global fund market, it is still an open question that whether they are an investment Utopia for investors. To answer this question, more time and proofs are needed.

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About Author

YT Kum, CFA  YT Kum is a consultant for Morningstar, contributing to manager selection and asset allocation activities in Asia, and is responsible for providing investment thought leadership on topics relevent to investors in Asia.  

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