Lion-Nomura Japan Active ETF (Powered by AI): In-Depth Report and Shareholder Insights

Key Highlights from the Latest Prospectus

• Fund Overview: The Lion-Nomura Japan Active ETF (Powered by AI) is an actively managed exchange traded fund (ETF) listed on the Singapore Exchange (SGX-ST). Its main objective is to achieve long-term capital growth through investment in a diversified portfolio of Japanese equity securities, spanning different sectors and market capitalisations.
• AI-Driven Active Management: The Fund leverages advanced Artificial Intelligence (AI) and machine learning models to select stocks with the highest potential for outperformance in the Japanese market. The models are updated monthly, using a broad set of metrics including valuation (e.g., price/book ratio, price/earnings ratio), technical indicators (e.g., momentum, market price, volume), and incorporate new data, company filings, and news. The final portfolio typically consists of 50 to 100 stocks, chosen for their capital appreciation potential within strict risk constraints.
• Reference Benchmark: The Tokyo Stock Price Index (TOPIX) is used solely for performance comparison, not as a constraint or target. The fund is not required to mirror the index, allowing for significant deviation from benchmark weightings.
• Investment Restrictions & Borrowing Policy: The Fund adheres to strict investment guidelines under Singapore’s regulations. Notably, the Fund does not invest in commodities, unlisted securities, precious metals, ETFs, REITs, or engage in securities lending/repurchase transactions. Borrowings are permitted only on a temporary basis, not to exceed 10% of NAV and for periods not exceeding one month.
• Expense and Turnover Ratios: For the period ending 31 December 2024, the Fund’s annualised expense ratio is 1.26%, and the turnover ratio is exceptionally high at 352%, reflecting the active trading strategy and monthly portfolio rebalancing.
• Management and Fees: The Manager, Lion Global Investors Limited, charges a management fee of 0.70% per annum, with a maximum cap of 0.99% per annum. Other fees (trustee, custodian, administration, legal, audit, etc.) may cumulatively exceed 0.10% of NAV depending on the Fund size and activities.
• Distributions: The Fund does not intend to make regular distributions (dividends) for SGD Class Units, focusing instead on capital appreciation.
• Liquidity and Market Making: The Fund is supported by designated market makers (Phillip Securities Pte Ltd and Flow Traders Asia Pte. Ltd.), which are intended to provide liquidity on the SGX-ST.

Material Risks, Shareholder Considerations and Price-Sensitive Information

• AI Model and Data Risk: The Fund’s AI-driven strategy means performance is highly dependent on the quality, accuracy, and timeliness of the data ingested by the AI models. Any errors, omissions, or failures in the data or model could result in sub-optimal portfolio selection and underperformance.
• High Portfolio Turnover: The Fund’s strategy involves frequent trading, with monthly rebalancing and a turnover ratio of 352%. This may lead to higher transaction costs, which can impact net returns and potentially increase NAV volatility.
• Single Market Concentration: The Fund invests almost exclusively in Japanese equities, making it significantly exposed to country-specific risks—such as economic, political, and natural disaster risks unique to Japan. This narrow focus may result in greater NAV volatility compared to more diversified funds.
• Currency/Foreign Exchange Risk: As the base currency is Japanese Yen (JPY), fluctuations in exchange rates (especially for SGD or USD investors) can materially affect the value of the Units and returns to Singapore-based investors.
• Absence of Prior Active Market and Potential for NAV Deviations: While Units are listed on the SGX-ST, there is no guarantee of an active or liquid market. Units may trade at a premium or discount to NAV, especially during volatile periods. The Fund’s “indicative NAV” (iNAV) is for reference only and is not an official, tradable NAV.
• Transparency and Timeliness of Portfolio Disclosure: Unlike passive ETFs, this Fund discloses its portfolio holdings only monthly (with up to a 1-month lag). Investors will not have real-time insight into current holdings, potentially adding to uncertainty and trading risk.
• Taxation: The Fund is structured to enjoy tax exemption under Singapore’s Section 13D Scheme (and may apply for Section 13U in the future). However, should the Fund lose its qualifying status, it may become subject to Singapore income tax, which could adversely impact NAV and investor returns.
• Operational and Cybersecurity Risks: The Fund and its service providers may be susceptible to cyber-attacks or operational failures which can disrupt operations or compromise sensitive information, affecting Fund performance and investor confidence.
• Creation and Redemption Restrictions: Only Participating Dealers can create or redeem Units directly with the Fund, and only in large Application Unit sizes (50,000 Units or multiples thereof). Retail investors may only buy/sell on the SGX-ST, which could affect liquidity and pricing for small holders.
• Potential for Material Changes: The Fund’s investment policy and objective cannot be changed for at least 3 years from the initial prospectus date without an extraordinary resolution of Unitholders or waiver by the SGX-ST.

Potential Share Price Movers & Shareholder Impact

• AI Model Performance and Updates: Any developments, enhancements, or issues with the AI model could materially impact performance and, by extension, the Fund’s market price. Investors should monitor Fund announcements regarding model changes or performance reviews.
• Expense and Turnover Ratios: The high expense and turnover ratios may be viewed negatively by some investors, as they can erode net returns, especially during periods of market turbulence or underperformance.
• Tax Status Changes: Loss of tax-exempt status under Section 13D or inability to transition to Section 13U could materially impact returns, leading to NAV declines and possible price drops.
• Market Volatility and Liquidity: Any significant volatility in the Japanese equity market, changes in currency rates, or disruption in market making could cause the Fund’s units to trade at significant premiums or discounts to NAV, impacting investor returns in the short term.
• Operational Announcements: Any changes to key service providers (manager, market makers, custodian, or investment advisor), suspension of dealings, or notable cybersecurity incidents could be price sensitive.

Conclusion

The Lion-Nomura Japan Active ETF (Powered by AI) offers investors access to an actively managed, AI-driven approach to Japanese equities. While it provides the potential for long-term capital growth, the fund carries significant risks related to its strategy, market concentration, high trading activity, and operational factors. Investors should be mindful of the unique risk profile, fee structure, and the implications of fund-level and market developments that may impact the value of their holdings.

Disclaimer: This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. Investors should consult the official prospectus and seek professional advice before making any investment decisions. The value of investments may go up or down, and past performance is not indicative of future results.

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