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Published on February 18, 2008

Fund managers do not want to lose their shirts over diminishing returns from ECPs, which, particularly in a weak-dollar climate and factoring in all operational and transaction costs, including foreign exchange, would amount to equal or even less than the average bank savings rate for investors.

But not that many financial instruments offer short-term 3-per-cent-plus returns.

Vasu Suthipongchai, a fund manager with Asset Plus Fund Management, reckons that CLNs will help fill in the blank with their similar returns of about 3.1 per cent in its Asset Plus Premium 6M2 Fund, to be publicly offered in late February or early March if approved by the Securities and Exchange Commission.

CLNs, a security with an embedded credit-default swap, allow the issuer to transfer a specific credit risk to investors, said Duandao Pantoomwanich, SEC's assistant director. Upon maturity, barring default or bankruptcy, investors get returns linked to the performance of the underlying assets.

Although a form of derivatives and classed under structure notes, which includes the notorious mortgage-backed collaterised debt obligations responsible for the sub-prime crisis, CLNs have been tamed in Thailand. The SEC's guidelines stipulate that CLNs created under a new entity, namely a special-purpose vehicle, must come from investment banks with at least an agency A rating, though of course in the context of the sub-prime crisis a question mark hangs over the reliability and accuracy of the rating agencies themselves.

What sets CLNs apart from their predecessors, though, is that they allow fund managers to invest in assets otherwise too expensive or inaccessible. South Korean government bonds, for instance, require a hefty withholding tax of 14.7 per cent, that is if you are lucky enough to get past the strict foreign-ownership limitation to begin with.

To get a piece of the high-interest action, Asset Plus circumvented these Korean restrictions by buying CLNs from A-rated banks such as Barclays and Standard Chartered.

It is only a matter of time before all the major investment-management companies jump on the bandwagon.

Ki Nan Tsui

The Nation