Benchmark Mutual Fund specializes in passive investments. It has four Exchange Traded Funds (ETFs) i.e. NIFTY BEES, Junior BEES, PSU Bank BEES, Bank BEES, Shariah BEES, Liquid BEES and Gold BEES. It has now launched India’s first international ETF, Hang Seng BeES, based on Hong Kong stock exchange’s Hang Seng index. This ETF will be listed on the National Stock Exchange (NSE).
Hang Seng Index
The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 45 companies represent about 67% of capitalization of the Hong Kong Stock Exchange.
Hang Seng Index was started on November 24, 1969, and is currently compiled and maintained by HSI Services Limited, which is a wholly owned subsidiary of Hang Seng Bank, the largest bank registered and listed in Hong Kong in terms of market capitalisation. It is responsible for compiling, publishing and managing the Hang Seng.
When the Hang Seng Index was first published, its base of 100 points was set equivalent to the stocks’ total value as of the market close on July 31, 1964. Its all-time low is 58.61 points, reached retroactively on August 31, 1967, after the base value was established but before the publication of the index. The Hang Seng passed the 10,000 point milestone for the first time in its history on December 10, 1993 and, 13 years later, passed the 20,000 point milestone on December 28, 2006. In less than 10 months, it passed the 30,000 point milestone on October 18, 2007. Its all-time high, set on October 30, 2007, was 31,958.41 points during trading and 31,638.22 points at closing. From October 30, 2007 through March 9, 2008, the index lost 9,426 points or approximately 30%. On September 5, it fell past the 20,000 mark the first time in almost a year to a low of 19,708.39, later closing at 19,933.28. On October 8, 2008, the index closed at 15,431.73, over 50% less than the all-time high and the lowest closing value in over two years. On October 27, 2008, the index fell to 10,676.29 points, having fallen nearly two-thirds from its all-time peak. But stocks passed the 20,000 point milestone again to 20,063.93 on 24 July 2009. (Credit: Wikipedia)
The index has a 37 per cent representation from of H-Share companies (those incorporated in mainland China and listed in Hong Kong) and about 17 per cent from the Red Chips companies (incorporated outside mainland China but controlled by mainland entities and with at least 50 per cent share of sales revenue or profits or assets from mainland China); while the remaining are HK Ordinary shares.
Among the well-known index constituents are companies such as HSBC Holdings, China Mobile, Bank of China, Petro China and Tencent Holdings.
The advantages of Hang Seng BEES are the following:
Immunity from India – specific concerns:
The Hang Seng BEES will not be affected by India-specific issues like failure of monsoons, political upheavals, fiscal deficit, etc while Indian stocks will obviously be sensitive to these issues.
Participation in fast growing economy:
Hong Kong and China have been the fastest growing economies in the World. China in particular has grown at a scorching pace in the last couple of years and that trend will continue in the foreseeable future as well.
Participation in global businesses:
Hong Kong is home to several billion dollar mega corporations that are several times the size of the largest Indian corporations. The advantage of investing in such mega corporations is that they are not unduly affected by exposures to one geographic location. For example, McDonald, Coke & Pepsi were relatively unaffected by the US slowdown because they had substantial investments in other countries. Likewise, HSBC Holdings plc and Hang Seng Bank Ltd have substatial exposure to other territories.
Diverse basket of industries:
One other advantage is that one can invest in a diverse basket of industries. The Hang Seng Index has four sub-indices which make the index clearer and classify constituent stocks into four distinct sectors. The four sub-indices are Hang Seng Finance Sub-index, Hang Seng Utilities Sub-index, Hang Seng Properties Sub-index and the Hang Seng Commerce & Industry Sub-index.
Higher dividend yield:
According to Benchmark, the dividend yield on the Hang Seng is higher at 3.25% as compared to the Nifty’s 1.01%.
Going by the past track-record, Indian equities offer a better return. In the last five years (except for the savage crash of 2008) the Nifty outperformed the Hang Seng Index. Between October 2004 and January 2010, the Hang Seng Index gave a compounded annual return of 12.01 per cent while the Nifty gave a return of 22.2 per cent. In 2009, the Nifty returned 76% while the Hang Seng Index lagged behind at 52 per cent.
Another point to be noted is that while China has grown at a scorching pace thanks to being the biggest manufacturer in the world, only 54% of the stocks in the Hang Seng Index are directly involved with the Chinese economy. The rest of the stocks are of companies involved in the Hong Kong economy. The returns from the Hang Seng Index will consequently not mirror the returns from the Chinese economy.
Profits are taxable:
Presently, u/s 10 (38) of the Income-tax Act, long-term capital gains (one year and beyond) on transfer of shares and equity-oriented mutual funds are not chargeable to tax. This exemption will not apply to the Hang Seng BEES. Long-term capital gains from the Hang Seng Bees will be chargeable to tax at 10 per cent without indexation or at 20% after indexation. Short-term capital gains (even for domestic shares and units) are taxed as normal income.
Risk of foreign exchange fluctuation:
The Hong Kong dollar is benchmarked to the US dollar at a fixed exchange rate. If the value of the rupee to the dollar appreciates, the investor will lose out because he gets less rupees when the units are redeemed.
Co-relation between the Nifty & the Hang Seng Index:
For proper diversification, there must be no co-relation between two groups of assets. However, in the present case, the co-relation between the Hang Seng Index and the Nifty is reported to be 0.64 which is quite high. The sources of investments in the stocks of the said two indices, namely, the FIIs is also common. The result is that the Hang Seng Index may mirror the behaviour of the Nifty or the sensex to a great extent, frustrating the objective of diversification.
Concentration of financial stocks:
Though the Hang Seng Index has four sub-indices, it can be seen that up to 50% of the index is composed of financial stocks. The result is that the Hang Seng is sensitive to financial factors such as an increase in interest rates.
The alternatives available are actively managed funds such as the Fortis China-India Fund which invests directly in Chinese equities up to 35 per cent of the corpus. There are others like the JP Morgan JF Greater China Equity Offshore Fund and the Mirae Asset China Advantage Fund. However, the advantage of a passive index fund like the Hang Seng BEES is that the costs will be much lower than that of the actively managed funds.