Db Advisory Multibrands - Sales Prospectus An investment company with variable capital (SICAV) incorporated under Luxembourg law September 30 ...
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DWS Investment S.A. db Advisory Multibrands Sales Prospectus An investment company with variable capital (SICAV) incorporated under Luxembourg law September 30, 2020
Contents
A. Sales Prospectus – General Section 2
General information 2
Investor profiles 18
Investment Company 19
Management Company 30
Depositary 31
B. Sales Prospectus – Special Section 36
db Advisory Multibrands – AMUNDI Smart Absolute Return 36
db Advisory Multibrands – db Credit Selection 38
db Advisory Multibrands – AMUNDI ESG Sustainable Balanced 40
db Advisory Multibrands – db World Selection Plus 42
db Advisory Multibrands – DWS StepIn ESG Global Equities 44
db Advisory Multibrands – DWS StepIn Global Equities Evolution 47
db Advisory Multibrands – Franklin Templeton Global Conservative Portfolio 49
db Advisory Multibrands – Invesco Multi Asset Risk Diversified 51
db Advisory Multibrands – JPMorgan Emerging Markets Active Allocation 53
db Advisory Multibrands – Nordea Sustainable Global Stars 55
db Advisory Multibrands – Pictet Multi Asset Flexible Allocation 57
db Advisory Multibrands – Pictet Thematic New Trends 59
db Advisory Multibrands – PIMCO Euro Coupon Bond Fund 61
db Advisory Multibrands – PIMCO High Income Global Credit Fund 63
Legal structure:
Umbrella SICAV according to Part I of the Law of December 17, 2010, on Undertakings
for Collective Investment.
General information
The investment company described in this ing eligible assets for investment by UCITS,” as The following provisions apply to all of the sub-
Sales Prospectus (“Investment Company”) is an amended, provide a set of additional explanations funds set up under db Advisory Multibrands. The
open-ended investment company with variable that are to be observed in relation to the financial respective special regulations for each of the
capital (“Société d’Investissement à Capital Vari- instruments that are applicable for UCITS falling individual sub-funds are contained in the special
able” or “SICAV”) established in Luxembourg in under Directive 2009/65/EC, as amended.3 section of the Sales Prospectus.
accordance with Part I of the Luxembourg law on The Investment Company may offer the investor
Undertakings for Collective Investment of Decem- one or more sub-funds (umbrella structure) at its
ber 17, 2010 (“Law of 2010”), and in compliance own discretion. The aggregate of the sub-funds
with the provisions of 2014/91/EU (amending Di- produces the umbrella fund. In relation to third
rective 2009/65/EC) (UCITS), as well as the provi- parties, the assets of a sub-fund are only liable
sions of the Grand-Ducal Regulation of February 8, for the liabilities and payment obligations involv- 1
Replaced by the Law of 2010.
2008, relating to certain definitions of the Law of ing such sub-fund. Additional sub-funds may be 2
Commission Directive 2007/16/EC of March 19, 2007,
December 20, 2002, on Undertakings for Collec- established and/or one or more existing sub- implementing Council Directive 85/611/EEC on the co-
tive Investment, as amended1 (“Grand-Ducal Reg- funds may be dissolved or merged at any time. ordination of laws, regulations and administrative provi-
ulation of February 8, 2008”), and implementing One or more share classes can be offered to the sions relating to undertakings for collective investment in
Directive 2007/16/EC2 (“Directive 2007/16/EC”) in investor within each sub-fund (multi-share-class transferable securities (UCITS) as regards the clarification
of certain definitions (“Directive 2007/16/EC”).
Luxembourg law. construction). The aggregate of the share classes 3
See CSSF circular 08-339 in the currently applicable
With regard to the provisions contained in Direc- produces the sub-fund. Additional share classes
version: CESR’s guidelines concerning eligible assets for
tive 2007/16/EC and in the Grand-Ducal Regulation may be established and/or one or more existing investment by UCITS – March 2007, ref.: CESR/07-044;
of February 8, 2008, the guidelines of the Commit- share classes may be dissolved or merged at any CESR’s guidelines concerning eligible assets for invest-
tee of European Securities Regulators (CESR) set time. Share classes may be consolidated into ment by UCITS – The classification of hedge fund indices
out in the document “CESR’s guidelines concern- categories of shares. as financial indices – July 2007, ref.: CESR/07-434.
1A. Sales Prospectus – General Section
1. General information Market risk Sub-funds offering non-base currency share
The price or market performance of financial classes might be exposed to positive or negative
The following provisions apply to all of the sub- products depends, in particular, on the perform currency impacts due to time lags attached to
funds set up under db Advisory Multibrands, ance of the capital markets, which in turn are necessary order processing and booking steps.
SICAV (the “Investment Company”). The respec- affected by the overall economic situation and
tive special regulations for each of the individual the general economic and political framework in Custody risk
sub-funds are contained in the special section of individual countries. Irrational factors such as The custody risk describes the risk resulting from
this Sales Prospectus. sentiment, opinions and rumors have an effect the basic possibility that, in the event of insol-
on general price performance, particularly on an vency, violation of due diligence or improper
exchange. conduct on the part of the Depositary or any
Notes sub-depositary, the investments in custody may
Country or transfer risk be removed in whole or in part from the Invest-
The legal basis for the sale of sub-fund shares is A country risk exists when a foreign borrower, ment Company’s access to its loss.
the current Sales Prospectus, to be read in despite ability to pay, cannot make payments at
conjunction with the Investment Company’s all, or not on time, because of the inability or Concentration risk
articles of incorporation. unwillingness of its country of domicile to exe- Additional risks may arise from a concentration
cute transfers. This means that, for example, of investments in particular assets or markets.
It is prohibited to provide any information or payments to which the respective sub-fund is The Investment Company`s assets then become
deliver any statements other than those of this entitled may not occur, or be in a currency that is particularly heavily dependent on the perform
Sales Prospectus. The Investment Company shall no longer convertible due to restrictions on ance of these assets or markets.
not be liable if such divergent information or currency exchange.
explanations are supplied. Risk of changes in interest rates
Settlement risk Investors should be aware that investing in
This Sales Prospectus, the Key Investor Informa- Especially when investing in unlisted securities, shares may involve interest rate risks. These
tion Document (“KIID”) and the annual and there is a risk that settlement via a transfer risks may occur in the event of interest rate
semi-annual reports may be obtained free of system is not executed as expected because a fluctuations in the denomination currency of the
charge from the Investment Company, the payment or delivery did not take place in time or securities or the respective sub-fund.
Management Company or the paying agents. as agreed.
Other important information will be communi- Legal and political risks
cated to shareholders in a suitable form by the Legal and tax risk Investments may be made for the Investment
Management Company. The legal and tax treatment of the sub-funds may Company in jurisdictions in which Luxembourg
change in ways that cannot be predicted or law does not apply, or, in the event of legal
influenced. In case of a correction with tax disputes, the place of jurisdiction is located
General risk warnings consequences that are essentially disadvanta- outside of Luxembourg. The resulting rights and
geous for the investor, changes to the sub-fund’s obligations of the Investment Company may vary
Investing in the shares of the Investment Com- taxation bases for preceding fiscal years made from its rights and obligations in Luxembourg, to
pany involves risks. These can encompass or because these bases are found to be incorrect the detriment of the Investment Company and/or
involve equity or bond market risks, interest rate, can result in the investor having to bear the tax the investor.
credit, default, liquidity and counterparty risks as burden resulting from the correction of preceding
well as exchange rate, volatility, or political risks. fiscal years, even though he may not have had an The Investment Company may be unaware of
Any of these risks may also occur along with investment in the sub-fund at the time. On the political or legal developments (or may only
other risks. Some of these risks are addressed other hand, the investor may also not benefit become aware of them at a later date), including
briefly below. Potential investors should possess from an essentially advantageous correction for amendments to the legislative framework in
experience of investing in instruments that are the current or preceding fiscal years during which these jurisdictions. Such developments may also
employed within the scope of the proposed he had an investment in the sub-fund if the lead to limitations regarding the eligibility of
investment policy. Investors should also have a shares are redeemed or sold before the correc- assets that may be, or already have been,
clear picture of the risks involved in investing in tion takes place. acquired. This situation may also arise if the
the shares and should not make a decision to Luxembourg legislative framework governing the
invest until they have fully consulted their legal, In addition, a correction of tax data can result in Investment Company and/or the management of
tax and financial advisors, auditors or other a situation where taxable income or tax benefits the Investment Company is amended.
advisors about (a) the suitability of investing in are actually assessed for tax in a different
the shares, taking into account their personal assessment period to the applicable one and Operational risk
financial and tax situation and other circum- that this has a negative effect on the individual The Investment Company may be exposed to a
stances, (b) the information contained in this investor. risk of loss, which can arise, for example, from
Sales Prospectus, and (c) the respective sub- inadequate internal processes and from human
fund’s investment policy. Currency risk error or system failures at the Investment Com-
To the extent that the sub-fund’s assets are pany, the Management Company or at external
It must be noted that investments made by a invested in currencies other than the respective third parties. These risks can affect the perform
sub-fund also contain risks in addition to the sub-fund currency, the respective sub-fund will ance of a sub-fund, and can thus also adversely
opportunities for price increases. The Investment receive income, repayments and proceeds from affect the net asset value per share and the
Company’s shares are securities, the value of such investments in these other currencies. If capital invested by the investor.
which is determined by the price fluctuations of the value of this currency depreciates in relation
the assets contained in the respective sub-fund. to the sub-fund currency, the value of the sub- Inflation risk
Accordingly, the value of the shares may rise or fund’s assets is reduced. All assets are subject to a risk of devaluation
fall in comparison with the purchase price. through inflation.
No assurance can therefore be given that the
investment objectives will be achieved.
2Key individual risk Risks connected to derivative After a trigger event, the recovery of the principal
The exceptionally positive performance of a transactions value mainly depends on the structure of the
sub-fund during a particular period is also attribut- Buying and selling options, as well as the conclu- CoCo, according to which nominal losses of the
able to the abilities of the individuals acting in the sion of futures contracts or swaps (including total CoCo can be fully or partially absorbed using one
interests of the sub-fund, and therefore to the return swaps), involves the following risks: of the three different methodologies: Equity
correct decisions made by their respective Conversion, Temporary Write-Down or Perma-
management. Fund management personnel can –– Price changes in the underlying instrument nent Write-Down. In case of temporary write-
change, however. New decision-makers might can cause a decrease in the value of the down feature, the write-down is fully discretion-
not be as successful. option or future contract, and even result in a ary and subject to certain regulatory restrictions.
total loss. Changes in the value of the assets Any distributions of remaining capital payable
Change in the investment policy underlying a swap or total return swap can after the trigger event will be based on the
The risk associated with the sub-fund’s assets also result in losses for the respective sub- reduced principal. A CoCo investor may suffer
may change in terms of content due to a change fund assets. losses before equity investors and other debt
in the investment policy within the range of –– Any necessary back-to-back transactions holders in relation to the same issuer.
investments permitted for the respective sub- (closing of position) incur costs which can
fund’s assets. cause a decrease in the value of the sub- CoCo terms structures may be complex and may
fund’s assets. vary from issuer to issuer and bond to bond,
Changes to this Sales Prospectus; –– The leverage effect of options swaps, futures following minimum requirements as laid out in
liquidation or merger contracts or other derivatives may alter the the EU Capital Requirements Directive IV /
The Investment Company reserves the right to value of the sub-fund’s assets more strongly Capital Requirements Regulation (CRD IV / CRR).
change this Sales Prospectus for the respective than the direct purchase of the underlying There are additional risks which are associated
sub-fund(s). In addition, the Investment Company instruments would. with investing in CoCos like:
may, in accordance with the provisions of its –– The purchase of options entails the risk that
articles of incorporation and Sales Prospectus, the options are not exercised because the a) Risk of falling below the specified trigger level
liquidate the sub-fund entirely or merge it with prices of the underlying instruments do not (trigger level risk)
another fund’s assets. For the investor, this change as expected, meaning that the sub-
entails the risk that the holding period planned fund’s assets lose the option premium they The probability and the risk of a conversion or of
by the investor will not be realized. paid. If options are sold, there is the risk that a write-down are determined by the difference
the sub-fund may be obliged to buy assets at between the trigger level and the capital ratio of
Credit risk a price that is higher than the current market the CoCo issuer currently required for regulatory
Bonds or debt instruments involve a credit risk price, or obliged to deliver assets at a price purposes.
with regard to the issuers, for which the issuer’s which is lower than the current market price.
credit rating can be used as a benchmark. Bonds In that case, the sub-fund will suffer from a The mechanical trigger is at least 5.125% of the
or debt instruments issued by issuers with a loss amounting to the price difference minus regulatory capital ratio or higher, as set out in the
lower rating are generally viewed as securities the option premium which had been received. issue prospectus of the respective CoCo. Espe-
with a higher credit risk and greater risk of –– Futures contracts also entail the risk that the cially in the case of a high trigger, CoCo investors
default on the part of the issuer than those sub-fund’s assets may make losses due to may lose the capital invested, for example in the
instruments that are issued by issuers with a market prices not having developed as case of a write-down of the nominal value or
better rating. If an issuer of bonds or debt instru- expected at maturity. conversion into equity capital (shares).
ments runs into financial or economic difficulties,
this can affect the value of the bonds or debt Risk connected to the acquisition At sub-fund level, this means that the actual risk
instruments (this value could drop to zero) and of shares of investment funds of falling below the trigger level is difficult to
the payments made on the basis of these bonds When investing in shares of target funds, it must assess in advance because, for example, the
or debt instruments (these payments could drop be taken into consideration that the fund managers capital ratio of the issuer may only be published
to zero). of the individual target funds act independently of quarterly and therefore the actual gap between
one another and that therefore multiple target the trigger level and the capital ratio is only
Additionally, some bonds or debt instruments are funds may follow investment strategies which are known at the time of publication.
subordinated in the financial structure of an identical or contrary to one another. This can result
issuer, so that in the event of financial difficulties, in a cumulative effect of existing risks, and any b) Risk of suspension of the coupon payment
the losses can be severe and the likelihood of opportunities might be offset. (coupon cancellation risk)
the issuer meeting these obligations may be
lower than other bonds or debt instruments, Risks relating to investments The issuer or the supervisory authority can
leading to greater volatility in the price of these in contingent convertibles suspend the coupon payments at any time. Any
instruments. Contingent convertibles (“CoCos”) are a form of coupon payments missed out on are not made
hybrid capital security that are from the perspec- up for when coupon payments are resumed. For
Risk of default tive of the issuer part of certain capital require- the CoCo investor, there is a risk that not all of
In addition to the general trends on capital ments and capital buffers. Depending on their the coupon payments expected at the time of
markets, the particular performance of each terms & conditions, CoCos intend to either acquisition will be received.
individual issuer also affects the price of an convert into equity or have their principal written
investment. The risk of a decline in the assets of down upon the occurrence of certain ‘triggers’ c) Risk of a change to the coupon
issuers, for example, cannot be eliminated even linked to regulatory capital thresholds or the (coupon calculation / reset risk)
by the most careful selection of the securities. conversion event can be triggered by the super-
visory authority beyond the control of the issuer, If the CoCo is not called by the CoCo issuer on
if supervisory authorities question the continued the specified call date, the issuer can redefine
viability of the issuer or any affiliated company as the terms and conditions of issue. If the issuer
a going-concern. does not call the CoCo, the amount of the cou-
pon can be changed on the call date.
3d) Risk due to prudential requirements i) Yield valuation risk In most cases, the securities markets in the
(conversion and write down risk) emerging markets are still in their primary stage
Due to the callable nature of CoCos it is not of development. This may result in risks and
A number of minimum requirements in relation certain what calculation date to use in yield practices (such as increased volatility) that usu
to the equity capital of banks were defined in calculations. At every call date there is the risk ally do not occur in developed securities markets
CRD IV. The amount of the required capital buffer that the maturity of the bond will be extended and which may have a negative influence on the
differs from country to country in accordance and the yield calculation needs to be changed to securities listed on the stock exchanges of these
with the respective valid regulatory law appli the new date, which can result in a yield change. countries. Moreover, the markets in emerging-
cable to the issuer. market countries are frequently characterized by
j) Unknown risk illiquidity in the form of low turnover of some of
At sub-fund level, the different national require the listed securities.
ments have the consequence that the conver Due to the innovative character of the CoCos and
sion as a result of the discretionary trigger or the ongoing changing regulatory environment for In comparison to other types of investment that
the suspension of the coupon payments can be financial institutions, there could occur risks carry a smaller risk, it is important to note that
triggered accordingly depending on the regula which cannot be foreseen at the current stage. exchange rates, securities and other assets from
tory law applicable to the issuer and that an emerging markets are more likely to be sold as a
additional uncertainty factor exists for the CoCo For further details, please refer to the ESMA result of the “flight into quality” effect in times
investor, or the investor, depending on the statement (ESMA/2014/944) from July 31, 2014 of economic stagnation.
national conditions and the sole judgment of the ‘Potential Risks Associated with Investing in
respective competent supervisory authority. Contingent Convertible Instruments’. Investments in Russia
If provided for in the special section of the Sales
Moreover, the opinion of the respective supervi Liquidity risk Prospectus for a particular sub-fund, sub-funds
sory authority, as well as the criteria of relevance Liquidity risks arise when a particular security is may, within the scope of their respective invest
for the opinion in the individual case, cannot be difficult to dispose of. In principle, acquisitions ment policies, invest in securities that are traded
conclusively assessed in advance. for a sub-fund must only consist of securities on the Moscow Exchange (MICEX-RTS). The
that can be sold again at any time. Nevertheless, exchange is a recognized and regulated market
e) Call risk and risk of the competent it may be difficult to sell particular securities at as defined by article 41(1) of the Law of 2010.
supervisory authority preventing a call the desired time during certain phases or in Additional details are specified in the respective
(call extension risk) particular exchange segments. There is also the special section of the Sales Prospectus.
risk that securities traded in a rather narrow
CoCos are perpetual long-term debt securities market segment will be subject to considerable Custody and registration risk in Russia
that are callable by the issuer at certain call dates price volatility. –– Even though commitments in the Russian
defined in the issue prospectus. The decision to equity markets are well covered through the
call is made at the discretion of the issuer, but it Assets in the emerging markets use of GDRs and ADRs, individual sub-funds
does require the approval of the issuer’s compe Investing in assets from the emerging markets may, in accordance with their investment
tent supervisory authority. The supervisory generally entails a greater risk (potentially includ policies, invest in securities that might
authority makes its decision in accordance with ing considerable legal, economic and political require the use of local depositary and/or
applicable regulatory law. risks) than investing in assets from the markets custodial services. At present, the proof of
of industrialized countries. legal ownership of equities in Russia is
The CoCo investor can only resell the CoCo on a delivered in book-entry form.
secondary market, which in turn is associated Emerging markets are markets that are, by –– The Shareholder Register is of decisive
with corresponding market and liquidity risks. definition, “in a state of transition” and are importance in the custody and registration
therefore exposed to rapid political change and procedure. Registrars are not subject to any
f) Equity risk and subordination risk economic declines. During the past few years, real government supervision, and the sub-
(capital structure inversion risk) there have been significant political, economic fund could lose its registration through fraud,
and societal changes in many emerging-market negligence or just plain oversight. Moreover,
In the case of conversion to equities, CoCo countries. In many cases, political considerations in practice, there was and is no really strict
investors become shareholders when the trigger have led to substantial economic and societal adherence to the regulation in Russia under
occurs. In the event of insolvency, claims of tensions, and in some cases these countries which companies having more than
shareholders may have subordinate priority and have experienced both political and economic 1,000 shareholders must employ their own
be dependent on the remaining funds available. instability. Political or economic instability can independent registrars who fulfill the legally
Therefore, the conversion of the CoCo may lead influence investor confidence, which in turn can prescribed criteria. Given this lack of inde
to a total loss of capital. have a negative effect on exchange rates, secu pendence, the management of a company
rity prices or other assets in emerging markets. may be able to exert potentially considerable
g) Industry concentration risk influence over the compilation of the share
The exchange rates and the prices of securities holders of the Investment Company.
Industry concentration risk can arise from and other assets in the emerging markets are –– Any distortion or destruction of the register
uneven distribution of exposures to financials often extremely volatile. Among other things, could have a material adverse effect on the
due to the specific structure of CoCos. CoCos changes to these prices are caused by interest interest held by the sub-fund in the corre
are required by law to be part of the capital rates, changes to the balance of demand and sponding shares of the Investment Company
structure of financial institutions. supply, external forces affecting the market or, in some cases, even completely eliminate
(especially in connection with important trading such a holding. Neither the sub-fund nor the
h) Liquidity risk partners), trade-related, tax-related or monetary fund manager nor the Depositary nor the
policies, governmental policies as well as inter Management Company nor the board of
CoCos bear a liquidity risk in stressed market national political and economic events. directors of the Investment Company (the
conditions due to a specialized investor base and “Board of Directors”) nor any of the sales
lower overall market volume compared to plain- agents is in a position to make any repre
vanilla bonds. sentations or warranties or provide any
4guarantees with respect to the actions or PRC are relatively new and their application is be subject to a risk of price fluctuations in
services of the registrar. This risk is borne by uncertain. Such regulations also empower the A-shares during the time when the Stock
the sub-fund. CSRC and the State Administration of Foreign Connect is not trading as a result.
Exchange (“SAFE”) to exercise discretion in their
At present, Russian law does not provide for the respective interpretation of the regulations, Restrictions on selling imposed by
concept of the good-faith acquirer as it is usually which may result in increased uncertainties in front-end monitoring
the case in western legislation. As a result of their application. PRC regulations require that before an investor
this, under Russian law, an acquirer of securities sells any share, there should be sufficient shares
(with the exception of cash instruments and d) Shenzhen and Shanghai-Hong Kong in the account; otherwise SSE will reject the sell
bearer instruments), accepts such securities Stock Connect risks order concerned. SEHK will carry out pre-trade
subject to possible restrictions of claims and checking on A-shares sell orders of its participants
ownership that could have existed with respect With Stock Connect, foreign investors (including (i.e. the stock brokers) to ensure there is no
to the seller or previous owner of these securi- the Sub-Fund) may directly trade certain eligible over-selling.
ties. The Russian Federal Commission for Securi- A-Shares through the so-called Northbound
ties and Capital Markets is currently working on Trading Link, subject to published laws and regula- Clearing, settlement and custody risks
draft legislation to provide for the concept of the tions in their respective applicable version. Stock The Hong Kong Securities Clearing Company
good-faith acquirer. However, there is no assur- Connect currently includes Shanghai-Hong Kong Limited, a wholly-owned subsidiary of HKEx (the
ance that such a law will apply retroactively to Stock Connect and Shenzhen-Hong Kong Stock “HKSCC”) and ChinaClear establish the clearing
purchases of shares previously undertaken by Connect. Shanghai-Hong Kong Stock Connect is a links and each is a participant of each other
the sub-fund. Accordingly, it is possible at this securities trading and clearing system developed to facilitate clearing and settlement of
point in time that the ownership of equities by a by Hong Kong Exchanges and Clearing Limited cross-boundary trades. As the national central
sub-fund could be contested by a previous owner (“HKEx”), China Securities Depository and Clear- counterparty of the PRC’s securities market,
from whom the equities were acquired; such an ing Corporation Limited (“China Clear”) and ChinaClear operates a comprehensive network
event could have an adverse effect on the assets Shanghai Stock Exchange (“SSE”) with the aim to of clearing, settlement and stock holding infra-
of that sub-fund. connect the stock markets of Shanghai and Hong structure. ChinaClear has established a risk
Kong. Similarly, Shenzhen-Hong Kong Stock management framework and measures that are
Investments in Connect is a securities trading and clearing sys- approved and supervised by the CSRC. The
People’s Republic of China (PRC) tem developed by HKEx, ChinaClear and Shen- chances of ChinaClear default are considered to
zhen Stock Exchange (“SZSE”) with the aim of be remote. Should the remote event of China-
a) Political, Economic and Social Risks connecting the stock markets of Shenzhen and Clear default occur and ChinaClear be declared
Hong Kong. as a defaulter, HKSCC will in good faith, seek
Any political changes, social instability and recovery of the outstanding stocks and monies
unfavourable diplomatic developments which Stock Connect comprises two Northbound from ChinaClear through available legal channels
may take place in or in relation to the PRC could Trading Links (for investment in A-shares), one or through ChinaClear’s liquidation. In that event,
result in the imposition of additional governmen- between SSE and the Stock Exchange of Hong the sub-fund may suffer delay in the recovery
tal restrictions including expropriation of assets, Kong Limited (“SEHK”), and the other between process or may not be able to fully recover its
confiscatory taxes or nationalisation of some of SZSE and SEHK. Investors may place orders to losses from ChinaClear.
the constituents of the Reference Index. In trade eligible A-shares listed on SSE (such securi- The A-shares traded through Shenzhen-Hong
vestors should also note that any change in the ties, “SSE Securities”) or on SZSE (such securi- Kong or Shanghai-Hong Kong Stock Connect are
policies of the PRC may adversely impact on the ties, “SZSE Securities”, and SSE Securities and issued in scripless form, so investors such as
securities markets in the PRC as well as the SZSE Securities collectively, “Stock Connect the sub-fund will not hold any physical A-Shares.
performance of the sub-fund. Securities”). Hong Kong and overseas investors, such as the
sub-fund, who have acquired SSE Securities
b) PRC Economic Risks Quota limitations risk through Northbound trading should maintain the
The Stock Connect is subject to quota limitations SSE Securities with their brokers’ or depositar-
The economy in the PRC has experienced rapid on investment, which may restrict the sub-fund’s ies’ stock accounts with the Central Clearing and
growth in recent years. However, such growth ability to invest in A-shares through the Stock Settlement System operated by HKSCC for the
may or may not continue, and may not apply Connect on a timely basis, and the sub-fund may clearing securities listed or traded on SEHK.
evenly across different sectors of the PRC not be able to effectively pursue their investment Further information on the custody set-up
economy. The PRC government has also imple- policies. relating to the Stock Connect is available upon
mented various measures from time to time to request at the registered office of the Manage-
prevent overheating of the economy. Further- Suspension risk ment Company.
more, the transformation of the PRC from a Both SEHK and SSE reserve the right to suspend
socialist economy to a more market-oriented trading if necessary for ensuring an orderly and Operational risk
economy has led to various economic and social fair market and managing risks prudently which The Stock Connect provides a new channel for
disruptions in the PRC and there can be no would adversely affect the sub-fund’s ability to investors from Hong Kong and overseas, such as
assurance that such transformation will continue access the PRC market. the sub-fund, to access the China stock market
or be successful. All these may have an adverse directly. The Stock Connect is premised on the
impact on the performance of the sub-fund. Differences in trading day functioning of the operational systems of the
The Stock Connect operates on days when both relevant market participants. Market participants
c) Legal System of the PRC the PRC and Hong Kong markets are open for are able to participate in this program subject to
trading and when banks in both markets are meeting certain information technology capabil-
The legal system of the PRC is based on written open on the corresponding settlement days. So it ity, risk management and other requirements as
laws and regulations. However, many of these is possible that there are occasions when it is a may be specified by the relevant exchange and/
laws and regulations are still untested and the normal trading day for the PRC market but Hong or clearing house.
enforceability of such laws and regulations Kong investors (such as the sub-fund) cannot
remains unclear. In particular, the PRC regula- carry out any A-shares trading. The sub-fund may
tions which govern currency exchange in the
5It should be appreciated that the securities Investor compensation system to allow the value of CNY to fluctuate
regimes and legal systems of the two markets Investments of the sub-fund through Northbound within a regulated band based on market supply
differ significantly and in order for the trial pro- trading under the Stock Connect will not be and demand and by reference to a basket of
gram to operate, market participants may need covered by Hong Kong’s Investor Compensation currencies. There can be no assurance that the
to address issues arising from the differences on Fund. Hong Kong’s Investor Compensation Fund CNY exchange rate will not fluctuate widely
an on-going basis. is established to pay compensation to investors against the USD or any other foreign currency in
Further, the “connectivity” in the Stock Connect of any nationality who suffer pecuniary losses as the future. Any appreciation of CNY against USD
program requires routing of orders across the a result of default of a licensed intermediary or is expected to lead to an increase in the Net
border. This requires the development of new authorised financial institution in relation to Asset Value of the sub-fund which will be
information technology systems on the part of the exchange-traded products in Hong Kong. denominated in USD.
SEHK and exchange participants (i.e. a new order Since default matters in Northbound trading via
routing system (“China Stock Connect System”) the Stock Connect do not involve products listed f) Onshore versus offshore Renminbi
to be set up by SEHK to which exchange partici- or traded in SEHK or Hong Kong Futures Exchange differences risk
pants need to connect). There is no assurance that Limited, they will not be covered by the Investor
the systems of the SEHK and market participants Compensation Fund. On the other hand, since While both onshore Renminbi (“CNY”) and off-
will function properly or will continue to be the sub-fund is carrying out Northbound trading shore Renminbi (“CNH”) are the same currency,
adapted to changes and developments in both through securities brokers in Hong Kong but not they are traded in different and separated markets.
markets. In the event that the relevant systems PRC brokers, therefore they are not protected by CNY and CNH are traded at different rates and
failed to function properly, trading in both markets the China Securities Investor Protection Fund in their movement may not be in the same direction.
through the program could be disrupted. The the PRC. Although there has been a growing amount of
sub-fund’s ability to access the A-share market Renminbi held offshore (i.e. outside the PRC),
(and hence to pursue their investment strategy) Trading costs CNH cannot be freely remitted into the PRC and is
will be adversely affected. In addition to paying trading fees and stamp subject to certain restrictions, and vice versa.
duties in connection with A-share trading, the Investors should note that subscriptions and
Nominee arrangements in holding A-shares sub-fund may be subject to new portfolio fees, redemptions will be in USD and will be converted
HKSCC is the “nominee holder” of the SSE dividend tax and tax concerned with income to/from CNH and the investors will bear the forex
securities acquired by overseas investors (includ- arising from stock transfers which are yet to be expenses associated with such conversion and
ing the sub-fund) through the Stock Connect. The determined by the relevant authorities. the risk of a potential difference between the CNY
CSRC Stock Connect rules expressly provide that and CNH rates. The liquidity and trading price of
investors enjoy the rights and benefits of the Regulatory risk the sub-fund may also be adversely affected by
SSE securities acquired through the Stock Con- The CSRC Stock Connect rules are departmental the rate and liquidity of the Renminbi outside the
nect in accordance with applicable laws. How- regulations having legal effect in the PRC. How- PRC.
ever, the courts in the PRC may consider that ever, the application of such rules is untested,
any nominee or depositary as registered holder and there is no assurance that PRC courts will g) Dependence upon Trading Market
of SSE securities would have full ownership recognize such rules, e.g. in liquidation proceed- for A-shares
thereof, and that even if the concept of beneficial ings of PRC companies. The Stock Connect is
owner is recognized under PRC law those SSE novel in nature, and is subject to regulations The existence of a liquid trading market for the
securities would form part of the pool of assets promulgated by regulatory authorities and imple- A-shares may depend on whether there is supply
of such entity available for distribution to credit mentation rules made by the stock exchanges in of, and demand for, A-shares. Investors should
ors of such entities and/or that a beneficial owner the PRC and Hong Kong. Further, new regula- note that the Shanghai Stock Exchange and
may have no rights whatsoever in respect tions may be promulgated from time to time by Shenzhen Stock Exchange on which A-shares are
thereof. Consequently, the sub-fund and the the regulators in connection with operations and traded are undergoing development and the
Depositary cannot ensure that the Sub- Fund’s cross-border legal enforcement in connection market capitalisation of, and trading volumes on,
ownership of these securities or title thereto is with cross-border trades under the Stock Con- those exchanges may be lower than those in
assured in all circumstances. nect. The regulations are untested so far and more developed financial markets. Market
Under the rules of the Central Clearing and Settle- there is no certainty as to how they will be volatility and settlement difficulties in the A-share
ment System operated by HKSCC for the clearing applied. Moreover, the current regulations are markets may result in significant fluctuation in
of securities listed or traded on SEHK, HKSCC as subject to change. There can be no assurance the prices of the securities traded on such
nominee holder shall have no obligation to take that the Stock Connect will not be abolished. The markets and thereby changes in the Net Asset
any legal action or court proceeding to enforce any sub-fund which may invest in the PRC markets Value of the sub-fund.
rights on behalf of the investors in respect of the through the Stock Connect may be adversely
SSE securities in the PRC or elsewhere. There- affected as a result of such changes. h) Interest Rate Risk
fore, although the relevant sub-fund’s ownership
may be ultimately recognised, the sub-fund may Further information about the Stock Connect is Sub-funds investing in PRC fixed-income
suffer difficulties or delays in enforcing their rights available online at the website: http://www.hkex. securities are subject to interest rate risk.
in A-shares. com.hk/eng/market/sec_tradinfra/chinaconnect/
To the extent that HKSCC is deemed to be chinaconnect.htm. Sub-funds investing in bonds issued by the
performing safekeeping functions with respect to government of the PRC (PRC Government
assets held through it, it should be noted that e) Government Control of Currency Conversion Bonds) are additionally subject to policy risk as
the Depositary and the Sub- Fund will have no and Future Movements in Exchange Rates changes in macro-economic policies in the PRC
legal relationship with HKSCC and no direct legal (including monetary policy and fiscal policy) may
recourse against HKSCC in the event that the Since 1994, the conversion of CNY into USD has have an influence over the PRC’s capital markets
sub-fund suffers losses resulting from the per been based on rates set by the People’s Bank of and affect the pricing of the bonds in the sub-
formance or insolvency of HKSCC. China, which are set daily based on the previous fund’s portfolio, which may in turn adversely
day’s PRC interbank foreign exchange market affect the return of such Sub-Fund.
rate. On July 21, 2005, the PRC government
introduced a managed floating exchange rate
6i) Dependence upon Trading Market impossible to ascertain. In such circumstances, p) Operational and Settlement Risk
for PRC Bonds valuation of the Sub-Fund’s investments may
involve uncertainties as there is a possibility that Settlement procedures in the PRC are less
The existence of a liquid trading market for PRC independent pricing information may at times be developed and may differ from those in countries
Bonds may depend on whether there is supply unavailable. that have more developed financial markets. The
of, and demand for, PRC Bonds. Investors should sub-fund may be subject to a risk of substantial
note that the Shanghai Stock Exchange, Shen- If such valuations should prove to be incorrect, loss if an appointed agent (such as a broker or a
zhen Stock Exchange and PRC inter-bank bond the Net Asset Value of the sub-fund may need to settlement agent) defaults in the performance of
market on which PRC Bonds are traded are be adjusted and may be adversely affected. Such its responsibilities. The sub-fund may incur
undergoing development and the market capital- events or credit rating downgrades may also substantial losses if its counterparty fails to pay
isation of, and trading volumes on, those markets subject the sub-fund to increased liquidity risk as for securities the sub-fund has delivered, or for
may be lower than those in more developed it may become more difficult for the sub-fund to any reason fails to complete its contractual
financial markets. Market volatility and settle- dispose of its holdings of bonds at a reasonable obligations owed to the sub-fund. On the other
ment difficulties in the PRC Bond markets may price or at all. hand, significant delays in settlement may occur
result in significant fluctuation in the prices of the in certain markets in registering the transfer of
securities traded on such markets and thereby m) Restricted markets risk securities. Such delays could result in substantial
changes in the Net Asset Value of the sub-fund. losses for the sub-fund if investment opportuni-
The sub-fund may invest in securities in respect ties are missed or if the sub-fund is unable to
j) Liquidity Risk of which the PRC imposes limitations or restric- acquire or dispose of a security as a result.
tions on foreign ownership or holdings. Such
The sub-fund is subject to liquidity risk as contin- legal and regulatory restrictions or limitations Trading in the PRC inter-bank bond market may
ued regular trading activity and active secondary may have adverse effects on the liquidity and expose investors to certain risks associated with
market for PRC securities (including PRC Bonds) performance of the sub-fund holdings as com- settlement procedures and the default of counter-
is not guaranteed. The sub-fund may suffer pared to the performance of the Reference parties. Much of the protection afforded to inves-
losses in trading in such instruments. The bid and Index. This may increase the risk of tracking error tors in securities listed on more developed
offer spread of the price of PRC securities may and, at the worst, the sub-fund may not be able exchanges may not be available in connection with
be large, so that the sub-fund may incur signifi- to achieve its investment objective and/or the transactions on the PRC inter-bank bond market
cant trading and realisation costs and may suffer sub-fund may have to be closed for further which is an over-the-counter market. All trades
losses accordingly. subscriptions. settled through CCDC, the central clearing for the
PRC inter-bank bond market, are settled on a
k) Issuer Counterparty Risk n) A-share market trading hours difference risk delivery versus payment basis i.e. if the sub-fund
is buying certain securities, the sub-fund will only
Investment in bonds by the sub-fund is exposed Differences in trading hours between foreign pay the counterparty upon receipt of such securi-
to the credit/insolvency risk of the issuers which stock exchanges (e.g. Shanghai Stock Exchange ties. If a counterparty defaults in delivering the
may be unable or unwilling to make timely and Shenzhen Stock Exchange) and the relevant securities, the trade may be cancelled and this
payments on principal and/or interest. PRC stock exchange may increase the level of pre- may adversely affect the value of the sub-fund.
Bonds held by the sub-fund are issued on an mium/discount of the Share price to its Net
unsecured basis without collateral. An issuer Asset Value because if a PRC stock exchange is q) Changes in PRC taxation risk
suffering an adverse change in its financial closed while the relevant stock exchange is
condition could lower the credit quality of a open, the Reference Index level may not be The PRC Government has implemented a num-
security, leading to greater price volatility of the available. ber of tax reform policies in recent years. The
security. A lowering of the credit rating of a current tax laws and regulations may be revised
security or its issuer may also affect the securi- The prices quoted by the relevant stock exchange or amended in the future. Any revision or amend-
ty’s liquidity, making it more difficult to sell. In market maker would therefore be adjusted to ment in tax laws and regulations may affect the
the event of a default or credit rating downgrad- take into account any accrued market risk that after-taxation profit of PRC companies and
ing of the issuers of the bonds, the bonds and arises from such unavailability of the Reference foreign investors in such companies.
the sub-fund’s value may be adversely affected Index level and as a result, the level of premium
and investors may suffer a substantial loss as a or discount of the Share price of the sub-fund to r) Government intervention and restriction risk
result. The sub-fund may also encounter difficul- its Net Asset Value may be higher.
ties or delays in enforcing its rights against the Governments and regulators may intervene in
issuer of bonds as the issuer is located in the o) A-share market suspension risk the financial markets, such as by the imposition
PRC and is subject to PRC laws and regulations. of trading restrictions, a ban on “naked” short
A-shares may only be bought from, or sold to, selling or the suspension of short selling for
l) Valuation Risk the sub-fund from time to time where the rele- certain stocks. This may affect the operation and
vant A-shares may be sold or purchased on the market making activities of the sub-fund, and
Where the trading volumes of an underlying Shanghai Stock Exchange or the Shenzhen Stock may have an unpredictable impact on the
security is low, it may be more difficult to achieve Exchange, as appropriate. Given that the A-share sub-fund.
fair value when purchasing or selling such under- market is considered volatile and unstable (with
lying security because of the wider bid-ask the risk of suspension of a particular stock or Furthermore, such market interventions may
spread. The inability to transact at advantageous government intervention), the subscription and have a negative impact on the market sentiment
times or prices may result in a reduction in the redemption of Shares may also be disrupted. An which may in turn affect the performance of the
sub-fund’s returns. Further, changing market Authorised Participant is unlikely to redeem or Reference Index and/or the sub-fund.
conditions or other significant events, such as subscribe Shares if it considers that A-shares
credit rating downgrades affecting issuers, may may not be available.
also pose valuation risk to the sub-fund as the
value of the sub-fund’s portfolio of fixed income
instruments may become more difficult or
7s) PRC taxation risk When a sub-fund conducts over-the-counter counterparties, the lack of any meaningful and
(OTC) transactions, it may be exposed to risks independent evaluation of such counterparties’
Any changes in tax policies may reduce the relating to the credit standing of its counter financial capabilities and the absence of a regu-
after-taxation profits of the investments in PRC parties and to their ability to fulfill the conditions lated market to facilitate settlement may
Bonds to which the performance of the sub-fund of the contracts it enters into with them. The increase the potential for losses by the
is linked. Whilst it is clear that interests on PRC respective sub-fund may consequently enter into sub-funds.
Bonds are specifically exempted from PRC Corpo- futures, options and swap transactions or use
rate Income Tax pursuant to the prevailing Corpo- other derivative techniques, for example total Risks related to securities lending and
rate Income Tax Law, uncertainties remain on PRC return swaps, which will expose that sub-fund to (reverse) repurchase agreements
indirect tax treatment on interest from PRC the risk of a counterparty not fulfilling its obliga- If the other party to a (reverse) repurchase agree
Bonds, as well as PRC Corporate Income Tax and tions under a particular contract. ment or securities lending transaction should
Indirect Tax treatments on capital gains derived by default, the sub-fund might suffer a loss to the
the sub-fund from investments in PRC Bonds. In the event of a bankruptcy or insolvency of a extent that the proceeds from the sale of the
counterparty, the respective sub-fund could underlying securities and/or other collateral held
In light of the uncertainties on the PRC tax experience delays in liquidating the position and by the sub-fund in connection with the securities
treatments on PRC Bonds and in order to meet significant losses, including declines in the value lending transaction or (reverse) repurchase agree-
any such potential PRC tax liabilities that may of its investment during the period in which the ment are less than the repurchase price or, as the
arise from investments in PRC Bonds, the Board fund seeks to enforce its rights, inability to case may be, the value of the underlying securi-
of Directors reserves the right to put in place a realise any gains on its investment during such ties. In addition, in the event of bankruptcy or
tax provision (“Capital Gains Tax Provision” or period and fees and expenses incurred in enforc- similar proceedings of the party to a (reverse)
“CGTP”) on the relevant gains or income and ing its rights. There is also a possibility that the repurchase agreement or a securities lending
withhold the tax for the account of the sub-fund. above agreements and derivative techniques are transaction or its failure otherwise to perform its
The Board of Directors determines at present not terminated due, for instance, to bankruptcy, obligations on the repurchase date, the sub-fund
to make any provision for the account of the supervening illegality or change in the tax or could suffer losses, including loss of interest on or
sub-fund in respect of any potential tax on capital accounting laws relative to those at the time the principal of the securities and costs associated
gains from investments of the sub-fund in PRC agreement was originated. with delay and enforcement of the (reverse)
Bonds. In the event that actual tax is collected by repurchase agreement or securities lending
the SAT and the sub-fund is required to meet Sub-funds may participate in transactions on transaction. Although it is expected that the use of
actual PRC tax liabilities, the Net Asset Value of over-the-counter markets and interdealer mar- repurchase agreements, reverse repurchase
the sub-fund may be adversely affected. Further, kets. The participants in such markets are agreements and securities lending transactions
there is a possibility of the tax rules being typically not subject to credit evaluation and will generally not have a material impact on a
changed and taxes being applied retrospectively. regulatory oversight as are members of sub-fund’s performance, the use of such tech-
As such, any provision for taxation made by the “exchange-based” markets. To the extent a niques may have a significant effect, either nega-
Board of Directors may be excessive or inade- sub-fund invests in swaps, derivative or synthetic tive or positive, on a sub-fund’s NAV.
quate to meet final PRC tax liabilities. instruments, or other over-the-counter transac-
tions, on these markets, such sub-fund may take Risks associated with the receipt
Consequently, Shareholders may be advantaged credit risk with regard to parties with whom it of collateral
or disadvantaged depending upon the final tax trades and may also bear the risk of settlement The Investment Company may receive collateral
liabilities, the level of provision and when they default. These risks may differ materially from for OTC derivatives transactions, securities
subscribed and/or redeemed their Shares. those entailed in exchange-traded transactions lending transactions and reverse repurchase
which generally are backed by clearing organisa- agreements. Derivatives, as well as securities
t) Accounting and Reporting Standards tion guarantees, daily marking-to-market and lent and sold, may increase in value. Therefore,
settlement, and segregation and minimum collateral received may no longer be sufficient to
Accounting, auditing and financial reporting capital requirements applicable to intermediaries. fully cover the Investments Company’s claim for
standards and practices applicable to companies Transactions entered directly between two delivery or redemption of collateral against a
in the PRC may differ from those in countries counterparties generally do not benefit from counterparty.
that have more developed financial markets. such protections.
These differences may lie in areas such as The Investment Company may deposit cash
different valuation methods of the properties and This exposes the respective sub-fund to the risk collateral in blocked accounts, or invest it in high
assets, and the requirements for disclosure of that a counterparty will not settle a transaction in quality government bonds or in money market
information to investors. accordance with its terms and conditions funds with a short-term maturity structure.
because of a dispute over the terms of the Though, the credit institution that safe keeps the
Counterparty risk contract (whether or not bona fide) or because of deposits may default; the performance of govern-
Risks may arise for the Investment Company as a credit or liquidity problem, thus causing the ment bonds and money market funds may be
a result of a contractual commitment with sub-fund to suffer a loss. Such “counterparty negative. Upon completion of the transaction, the
another party (a “counterparty”). In this context, risk” is accentuated for contracts with longer collateral deposited or invested may no longer be
there is a risk that the contracting party will no maturities where events may intervene to pre- available to the full extent, although the Invest-
longer be able to fulfil its contractual obligations. vent settlement, or where the fund has concen- ment Company is obligated to redeem the collat-
These risks may compromise the sub-fund’s trated its transactions with a single or small eral at the amount initially granted. Therefore, the
performance, and may therefore have a detri- group of counterparties. In addition, in the case Investment Company may be obliged to increase
mental effect on the share value and the capital of a default, the respective sub-fund could the collateral to the amount granted and thus
invested by the investor. become subject to adverse market movements compensate the losses incurred by the deposit or
while replacement transactions are executed. investment of collateral.
The sub-funds are not restricted from dealing
with any particular counterparty or from concen-
trating any or all of their transactions with one
counterparty. The ability of the sub-funds to
transact business with any one or a number of
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