Merrill Lynch targets Asian retail investors

The US investment bank’s move follows ongoing demand for capital guaranteed products from retail investors in the Special Administrative Region, which saw $3.8 billion – or 90% of the fund industry’s net sales – enter into capital guaranteed funds last year.

“To some extent, you could argue that we’ve been slow into this market, but I think we’ve thought strategically about how we want to be in the market,” comments John Robson, director of global equity markets at Merrill Lynch, based in Hong Kong.

The Merrill Lynch fund, called the Asian Multi Lock-in Fund, offers investors a guaranteed return of 105% over four years, with 100% participation to Merrill Lynch’s proprietary Asia Momentum Index, up to a maximum 4% per quarter or 16% per annum. The index comprises of a basket of 20 Asian stocks, which is rebalanced monthly, giving investors access to the stocks with best earning and price potential on an ongoing basis, says Robson.

The structure has an embedded lookback reset cliquet option, which locks in any gains over each of the 16 quarters, and resets the strike price if a new high is reached at the end of each quarter. So, if the index rises from 100 to 110 in the first quarter, the 10-point profit is locked in, and the strike price is reset at 110. If the index falls back to 100 over the next quarter, the investor receives no locked-in gain for that quarter, while the strike price remains at 110.

The move into the retail market is a major shift for the bank, which has previously offered capital guaranteed products exclusively to its private banking and institutional clients on a private placement basis. But the continuing demand from retail investors has prompted the bank to reconsider its strategy. “Merrill Lynch is known for its discretionary funds management and for the ability to take clients’ funds and make good on those funds within a managed fund environment,” says Robson. “But increasingly we see clients out there on the street that really want guaranteed fund products.”

The bank, however, will issue its retail-focused capital guaranteed funds under a slightly different brand name, Titanium Trust, to differentiate between its traditional funds business and the retail products. “We can’t ignore the fact that investors want guaranteed funds but we didn’t want to dilute the strength of the Merrill Lynch Investment Managers branding,” Robson adds.

And more funds are expected going forward, both in Hong Kong and elsewhere in the region. “We’re intending to bring more of these guaranteed and defined strategy funds, and those funds we expect will come every 10 weeks, so about four to five of them a year. Our goal next is to expand this into being regulator approved in other markets, to get it approved by the Monetary Authority of Singapore and potentially in Korea.”