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Chris Chapel

Volatile stock markets mean that investors are opting for the safer options

There are signs that  Hong Kong's investment market is becoming more 'retail' than ever, thanks to a combination of volatile stock markets, low bank deposit rates and one of the mutual fund industry's most popular products - the guaranteed fund.

A recent survey by the Hong Kong Investment Funds Association (HKIFA) found that 63 per cent of people who have invested in guaranteed funds had never bought mutual funds before.

Of those who had invested, 59 per cent said they had put in less than HK$50,000, and 73 per cent said they made their guaranteed fund investment through their primary bank.

Last year, guaranteed funds accounted for 26.7 per cent, or US$3.37 billion, of all gross mutual fund sales. The rush into these products, which offer a guaranteed return of capital, plus  further returns if held to maturity, slowed a little this year.

At the end of June, guaranteed funds were still the biggest-selling product, but they made up just 21.91 per cent, or US$2 billion, of total gross mutual fund sales. The second-biggest seller  in the first half of the year was US dollar bond funds, of which funds worth US$1.19 billion were sold, 12.8 per cent of the total.

Another insight from the HKIFA came from a survey last month, which found 9.5 per cent of the adult population, more than half a million people, hold mutual funds.

This penetration rate compared with just 7.8 per cent in 2000. The HKIFA attributed the leap in penetration to guaranteed funds, describing their grip on the market as 'probably one of the key, if not the most important, factors which has contributed to the growth of the investor base in the past two years'.

Chuak Chan, regional business development director for ING Investment Management, says guaranteed funds have attracted money 'from under people's beds' throughout Hong Kong, as bank depositors seek alternatives from their advisers, typically within the banks themselves. ING and other  large fund houses have been quick to provide their own guaranteed products to satisfy this demand.

Mr Chan says negative equity in the property market has had a significant impact on investor sentiment, with some investors moving right up the conservative end of the risk spectrum.

'Around the world, we are seeing investors beginning to take on a bit of risk now. But they are a lot more calculating about the way they assume risk. Hong Kong is more difficult because of the negative equity factor.'

Sandra Lee, director, head of retail, marketing and product development for HSBC Asset Management, says people are   more receptive to  mutual funds than  several years ago. With a volatile environment and more than 2,000 authorised fund vehicles, people need  to make sure they  understand what they  are buying, she says.

'We see so much volatility in the market and we expect this to continue. Look at Hong Kong: in August, everyone was so pessimistic, then all of a sudden with the relaxation of rules for mainland visitors and some other positive news, everything just turned around. Clearly, opportunities do come and risks do exist. So people believe it might be better to use professional fund managers in some cases.'

She says the bewildering array of investment products  is itself  one reason why some investors should act through a fund company.

'There is no lack of choice, which is great for investors, but you should understand what you are buying, that  it matches  your goals, and  you do regular reviews.'

For people who cannot stand the sharp ups and downs of stock markets, bonds offer an alternative, but capital losses can be made in the fixed-income market, too.

Patrick Chia, associate director, fixed income, for Credit Agricole, recommends that people wanting to invest in bonds should stick to Asian corporate bonds, rather than government instruments in the  prevailing economic environment, with US treasury yields rising. Asian credits (firms issuing bonds) are rated highly compared with counterparts in Eastern Europe or Latin America, as a result of deleveraging since the Asian financial crisis.

'The corporate scene in Asia has some very good names with good ratings, such as Hutchison and PCCW. There is a wealth of quite good credit paper to buy.'

Another plus with Asian corporate bonds is their relatively low correlation with US treasuries. As treasuries fall in value, Asian corporate bonds retain their value, with the spread between the two types of securities narrowing. The bond holder, however,  assumes greater risk in holding a corporate bond than a government instrument.

Mr Chia says selecting Asian credits for his bond funds involves an intense investment process. Based in Singapore, he works closely with the Credit Agricole team in Hong Kong.



Guaranteed funds get grip on the market