General Risks Disclosure for Discretionary Portfolio Management (DPM) Bond Funds
Investors should note that investment involves risks. The risk considerations and disclaimers in relation to funds as set out below are not intended to be exhaustive. Investors should refer to the relevant offering documents/prospectus for details and product features, in particular the risk factors.
Full principal is at risk.
Secondary Market and Liquidity Risk
Some investments may not have active secondary markets. It may be difficult to sell the units/shares of a fund if the fund does not offer a frequent and regular dealing day. Some investments in a fund may become illiquid (for example, over-the-counter or unlisted securities), and are subject to lower liquidity. Liquidity risk represents a fund not able to sell or buy these investments quickly enough to prevent or minimize a loss in the fund. If a transaction is particularly large and the relevant market is illiquid, purchases and sales of the fund may take longer than would otherwise be expected and transactions may need to be conducted at unfavorable prices. Investors must be prepared to hold the fund for a longer than expected time horizon.
Interest Rate Risk
A fund may carry interest rate risk. Changes in interest rates will impact the performance of the fund. Interest rates tend to change suddenly and unpredictably.
Foreign Exchange Risk
A fund may carry foreign exchange risk. Changes in the values between investors’ home currency and the fund’s currency, and changes in the values between the fund’s currency and investor’s local currency may impact the performance of the fund and the investment return. Foreign exchange rates may change suddenly and unpredictably.
Mark-to-market Risk
The market value of a fund is expected to fluctuate significantly according to various factors including but not limited to the financial, political, economic and other events. If the fund does not offer a frequent and regular dealing day, investors seeking to sell the fund may be subject to the prevailing market value which may be substantially less than the original purchase price.
Not a time deposit
Fund is not equivalent to, nor should it be treated as a substitute for, time deposit. It is not a protected deposit and is (a) not protected by the Hong Kong Deposit Protection Scheme in Hong Kong and the repayment of the fund is also not guaranteed by the Hong Kong SAR Government’s Exchange Fund and (b) not protected by the Deposit Insurance Scheme in Singapore and the repayment of the fund is also not guaranteed by the Singapore Government.
Conflicts of Interest
Various potential and actual conflicts of interest may arise from the overall investment activities or the roles of the parties involved in any investment product or transaction, their investment professionals and/or their affiliates. In particular, the counterparty / issuer / provider or its related entities or affiliates can offer or manage other investments which interests may be different to the interest of your investments in that investment product or transaction; or for cases where the product counterparty or issuer is BNP Paribas or its related entity or affiliate, BNP Paribas may also act as distributor, guarantor, calculation agent and/or arranger of the same product.
Risks associated with money / cash management funds
Investors should note that the purchase of a unit/share in a fund is not the same as placing funds on deposit with a bank or deposit taking company, that the management company has no obligation to redeem units/shares at the offer value and that the fund is not subject to the supervision of the Hong Kong Monetary Authority in Hong Kong or the Singapore Government.
Risks associated with warrant funds
Investors should note the nature of warrants and the risks inherent in investment in warrants. Prices of warrants may fall just as fast as they may rise, therefore the fund carries a significant risk of loss of capital. It is suitable only for those investors who can afford the risk involved.
Risks associated with futures and options funds
Investors should note the key features of the fund detailed in the offering document, including but not limited to, the type(s) of futures contracts (and, if appropriate, options), the risks inherent in such investment and the trading strategy to be adopted, the management, advisory and brokerage fees payable by the fund, the nature and size of transaction costs that are expected to be incurred by the scheme and the implications of expected greater number of transactions on the amount of these costs, etc.
Risks associated with guaranteed funds
Investors should note that due to the guarantee structure, there will be a dilution of performance. Potential returns in excess of the guaranteed amount are subject to investment risk and are not guaranteed. The fund is subject to the credit risk of the guarantor and the issuers of the underlying investments and is subject to the liquidity risk of the underlying investments.
Investors should also note the risks, if any, associated with conflicts of interest that may arise amongst different operating parties. The scope or validity of the guarantee may be affected under certain circumstances including, where relevant, the condition that the guarantee only applies to investors who hold their investments until the date specified in the guarantee and that dealings before such date are fully exposed to fluctuations in the value of the fund’s assets. Investors should pay attention details of the mechanism of any up-front charging fee structure and the cost implications to investors (where applicable) in the offering document.
Risks associated with index funds
Investors should note the description of the market or sector the index aims to represent, and the characteristics and general composition of the index and, where applicable, concentration in any economic sectors and/or issuers.
Investors should also note that the investment of the fund may be concentrated in the securities of a single issuer or several issuers and note the lack of discretion to adapt to market changes due to the inherent investment nature of fund and that falls in the index are expected to result in corresponding falls in the value of the fund. There is no guarantee or assurance of exact or identical replication at any time of the performance of the index, and there may be circumstances that may lead to tracking errors and the related risks, and strategies employed in minimizing such errors or circumstances that may affect the accuracy and completeness in the calculation of the index.
Investors should also note that index composition may change and securities may be delisted. Investors should also pay attention to whether the index provider and the management company of the scheme (or its connected persons) are independent of each other. If not, the means by which possible conflicts of interests may be addressed.
Risks associated with funds that invest in financial derivative instruments
Investors should note the risks associated with investments in financial derivative instruments. Investors should NOT invest in the fund unless they fully understand and are willing to assume the risks associated with financial derivative instruments. The fund investing in financial derivative instruments is exposed to the credit, potential contagion and concentration risks of the counterparties who issued the financial derivative instruments, and the market value of any collateral held by the fund may have fallen substantially when the fund seeks to realize such collateral; and (ii) the fund may be exposed to higher liquidity risk if such financial derivative instruments do not have an active secondary market.
Risks associated with funds investing in bonds
Investors are reminded not to treat all bonds as risk free products as they are subject to various risks including the following:
Credit risk: bonds are subject to the risk of the issuer defaulting on its obligations. It should also be noted that credit ratings assigned by credit rating agencies do not guarantee the creditworthiness of the issuer;
Liquidity risk: some bonds may not have active secondary markets and it would be difficult or impossible for investors to sell the bond before its maturity.
Interest rate risk: bonds are more susceptible to fluctuations in interest rates and generally prices of bonds will fall when interest rate rise.
Risks associated with high yield bonds
In particular, Investors should pay attention to funds invest primarily in high yield bonds with following characteristics that (i) they will be subject to the risks associated with investments in bonds as described above; and (ii) the net asset value of a fund that invests in such bonds may decline or be negatively affected if there is a default of any of the high yield bonds that it invests in or if interest rates change. The risks of high yield bonds may also include the following:
•Higher credit risk: Since high-yield bonds (non-investment grade bonds) are typically rated below investment grade or are unrated and as such are often subject to a higher risk of issuer default, greater possibility of default and greater price volatility.
•Vulnerability to economic cycles: During economic downturns high-yield bonds (non-investment grade bonds) typically fall more in value than investment grade bonds as (i) investors become more risk averse and (ii) default risk rises.
•Capital growth risk: some high-yield bond funds may have fees and/ or dividends paid out of capital. As a result, the capital that the fund has available for investment in the future and capital growth may be reduced;
•Dividend distributions: some high-yield bond funds may not distribute dividends, but instead reinvest the dividends into the fund or alternatively, the investment manager may have discretion on whether or not to make any distribution out of income and/ or capital of the fund. Also, a high distribution yield does not imply a positive or high return on the total investment; and
•Other key risks that may relate to the relevant fund including concentration of investments in particular types of specialized debt or a specific geographical region or sovereign securities.
Risks associated with bonds with special features
•Subordinated bonds: Investors should pay attention to the credit information in relation to the bond and the implications of its “subordinated” nature. Investors should note that holders of subordinated bonds will bear higher risks than holders of senior bonds of the issuer due to a lower priority of claim in the event of the issuer’s liquidation.
•Convertible bonds risk: When investing in such bond funds, such investments may have exposure to convertible bonds that are subject to the risks associated with both debt and equity securities, and to risks specific to convertible securities. Their value may change significantly depending on economic and interest rate conditions, the creditworthiness of the issuer (and/or the guarantor, as applicable), the performance of the underlying equity and general financial market conditions. In addition, issuers (and/or the guarantors, as applicable) of convertible bonds may fail to meet payment obligations and their credit ratings may be downgraded. Convertible bonds may also be subject to lower liquidity than the underlying equity securities.
•Perpetual bonds: Investors should note that perpetual bonds do not have a maturity date, and the coupon payments may be deferred or even suspended subject to the terms and conditions of the issue. Furthermore, as perpetual bonds are often callable and / or subordinated, investors should note the reinvestment risk, and / or a lower priority of claims (e.g. on liquidation of the issuer), as the case may be.
•Bonds with other special features - callable, discretionary coupons, variable / deferred interest payment terms or extendable maturity dates: Callable bonds are callable and investors face reinvestment risk when the issuer exercises its right to redeem the bond before it matures. Some bonds have discretionary coupons, variable and/or deferral of interest payment terms. For any such bonds, investors would face uncertainty over the amount and time of the interest payments to be received, or investors may not receive any coupons. Some bonds have an extendable maturity date and investors would not have a definite schedule of principal repayment.
•Bonds with multiple credit support providers and structures: cover structures such as a bond having multiple guarantors. Such bonds are considered as complex products given that some of these bonds may have multiple credit support providers with no material operations, or may involve complex structures which subordinate the bondholders’ rights to those of the multiple credit support providers.
•Contingent convertible (1) or bail-in (2) bonds: Given contingent convertible and bail-in bonds are hybrid debt-equity instruments that may be written off or converted to common stock on the occurrence of a trigger event, investors should note the product nature, the trigger events, and implications of any trigger to the investors.
•(1) “Contingent convertible bonds” refer to bonds that contain a clause requiring them to be written off or converted to common stock on the occurrence of a trigger event. These bonds generally absorb losses while the issuer remains a going concern (i.e. in advance of the point of non-viability). (2) “Bail-in” generally refers to (a) contractual mechanisms (i.e. contractual bail-in) under which bonds contain a clause requiring them to be written off or converted to common stock on the occurrence of a trigger event, or (b) statutory mechanisms (i.e. statutory bail-in) whereby a national resolution authority writes down or converts bonds under specified conditions to common stock. Bail-in bonds generally absorb losses at the point of non-viability.
•Financial bonds (bonds related to the financial sector): When investing in financial bonds with convertible or exchangeable features, such investments will be subject to both equity and bond investment risk. Bonds that have contingent write down or loss absorption features may be written-off fully or partially or converted to common stock on the occurrence of a trigger event. Some financial bonds (including subordinated or even senior bonds), though are not classified by the market as Contingent Convertibles (Cocos) with explicit capital trigger for loss absorption, may also have loss absorption features, including (1) those with contractual loss absorption at point of non-viability (PONV), (2) those in countries with statutory bail-in, and/or (3) those in countries that are likely to have statutory bail-in before the maturities of these bonds. Holders of subordinated debentures will bear higher risks than holders of senior debentures of the issuer due to a lower priority of claim in the event of the issuer’s liquidation.
Risks associated with funds that invest in or are linked to bonds with loss-absorption features
Funds that invest mainly in, or whose returns are closely linked to the performance of, bonds or debt instruments (i.e. underlyings) with features of contingent write-down or conversion to ordinary shares on the occurrence of (1) when a financial institution is near or at the point of non-viability (PONV); or (2) when the capital ratio of a financial institution falls to a specified level, are considered as loss absorption products and would be subject to additional risks. Investors should take note that such underlyings are subject to the risk of being written down or converted to ordinary shares (as the case may be). For Tier 1/Tier 2/Tier 3 bonds as underlyings, the loss absorption mechanism is triggered at PONV, whereas for Coco bonds as underlyings, the loss absorption mechanism is triggered with a mechanical trigger as specified in the prospectus or at PONV.
Regardless of the triggering mechanism in respect of the underlyings, it may potentially result in substantial losses to your investment. Please note that the priority of claims for reimbursement depends on the subordination hierarchy of the various capital and financing buffers in respect of the underlyings, at which for example, the holders of subordinated debts are only repaid after the holders of senior debts have been fully reimbursed. Please take note that investing in underlyings with loss absorption features may potentially result in substantial losses. Accordingly, products investing in or are linked to such underlyings are high risk and complex, as the circumstances in which such products may be required to bear losses are difficult to predict and ex ante assessments of the quantum of losses will be highly uncertain. Such products are generally not suitable for retail investors.