Around 55% of BFS Asian Assets split capital investment company, which is due to list next month, wi...
Around 55% of BFS Asian Assets split capital investment company, which is due to list next month, will be invested in Japanese and Asian equities.
The split within this part of the portfolio will be 70% Japan and 30% Asia. Jade Absolute, which is running this part of the portfolio, said the bias towards Japan was "inevitable".
Stephen Swift, who will co-run the portfolio with Scott McGlashan, said: "With returns having to be in yen and the portfolio being benchmarked against the Topix, it is obvious that we will have a significant exposure to Japan."
He added that the split between Japan and Asia will be complementary, as the former is a mature market that is restructuring, and the latter is growing and developing.
Initially, the portfolio will have a bias towards north-east Asian countries, such as South Korea and Taiwan, as Swift believes they offer the most growth potential. He said: "These Asian countries have become very competitive in the semiconductor manufacturing industry. In Japan we will be looking for stocks where value can be unlocked for shareholders, for instance, through corporate restructuring and the sale of cross shareholdings. "We are averse to investing in technology companies as some are extremely overvalued at present."
To obtain the required income element BFS will use its expertise in reverse convertibles, with this part of the portfolio run by John Holder. Holder will invest in both yen and sterling and euro-denominated paper.
Reverse convertibles are issued by the big investment banks and are generally linked to equities.
For instance, UBS issued a British Telecom reverse convertible last year priced at 100p, yielding 12% and expiring on 29 March 2001. A significant feature of this type of paper is the strike price which in the case of the BT issue was 889p, the share price of the equity at issue of the paper.
If on 29 March 2001 the equity is trading above or equal to the strike price, the holders of the reverse convertible will receive their full investment back.
If the equity is trading below the strike price the holder will receive BT equity. For example, if an investor initially bought £1,000 worth of paper and on expiry BT shares were trading 10% below the strike price, the investor would receive £900-worth of BT shares. When investing in the yen-denominated reverse convertibles.
Holder will not have to hedge as the bank loan, which consists of 35% of the capital structure of the fund, is in yen. The charge on borrowing the money is 2.8%pa, while for borrowing in sterling it would have been 7.8%pa.
Three types of paper will make up the remaining 65% of the capital structure.
Some 25% will be a new type of share linked to the Topix index. The shares are priced at 100p with an initial NAV of 115p providing for outperformance.
If the index doubles over the seven year life of the trust investors will receive 230p. If it halves in value investors will get back 57.5p, a 42.5% fall in their initial investment compared with a 50% fall in the index.
About 34% of the structure will be made up of 85p income shares yielding 10%. These shares will be redeemed at 100p in 2007.
The remaining 6% of the structure consists of 15p capital shares.
Investors can also purchase units, yielding 8.5%, of one income share and one capital share.
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