Savvy investors raise bar for planners

PUBLISHED : Friday, 02 November, 2007, 12:00am
UPDATED : Friday, 02 November, 2007, 12:00am

For professional financial planners in Hong Kong, the bar keeps rising. They must be adept not only at dealing with the demands and queries of an increasingly knowledgeable clientele, but also have informed and up-to-date opinions on the pros and cons of a steadily expanding range of investment choices.

'In the past few years, the SFC [Securities and Futures Commission] has authorised quite a lot of new investments,' said Paul Pong Po-lam, managing director of Pegasus Fund Managers.

'Nowadays, there are more than 2,000 authorised funds and individuals don't necessarily have time to do asset allocation and choose funds for themselves.'

But he said since the advent of the MPF, the average investor was more sophisticated and had a far better understanding of how funds worked. So when seeking advice from a financial planner, they expected to see evidence of in-depth preparation and to hear recommendations that fully met their needs and circumstances.

'The general investor is not just looking for one or two funds, but for a more complete assessment and more tailor-made advice for their level of risk and long-term horizons,' Mr Pong said. 'The planner must take a portfolio approach, not a product approach. This is more complicated and [involves] more research.'

He said with the stock market scaling new heights, many people had developed a greater appetite for risk. They were looking beyond the more conservative balanced funds, hoping to capitalise on the opportunities for higher returns elsewhere.

This had led to increasing interest in emerging market and single-country funds focusing on Asia, the Middle East, Brazil, Russia and Vietnam. New themed funds had also found strong levels of support. Based around concepts such as energy, infrastructure, the environment or natural resources, they provided a means of investing in companies clustered in fast-growth sectors or presumed to be operating in socially responsible ways.

Mr Pong said that the fund of funds and multi-adviser products were also proving very attractive, but they created a new level of complexity for planners. 'It requires a very good understanding not just of the products but of who manages them,' he said. 'If individual fund managers changed jobs, it can hurt performance, so you have to ... make quick decisions with the client to switch to other investments.'

To advise on asset allocation, it is also essential to be well up on broader economic and political developments.

'For example, European markets did well last year because of the appreciation of the euro, but this year interest rate rises are affecting the property sector,' he said. 'So, [people] may want to cut US and European investments and go into Asian, China or natural resources funds.' He said there was likely to be increased demand for technology funds partly because of the mainland government's stated interest in boosting investment in the sector.

To ensure consultants are aware of such developments and their implications, the firm arranges frequent internal briefings and regards the selection, training and ongoing education of staff as a priority.

Ernest Leung Yin-wing, director of TG Holborn (HK), said: 'To make sure investment planning is right is a very sophisticated process.'

He said one of the most difficult things in the current market was to keep clients' feet on the ground. So consultants required financial knowledge and the skills to guide clients towards a suitable asset allocation strategy.

'You have got to prepare them for change and get them to keep this in mind,' Mr Leung said. Citing the example of A-share and H-share unit trusts, which had been very popular recently, he said there was a delicate balancing act to perform.

On the one hand, it is necessary to comply with a client's requirements if they want to invest more in the same instruments. On the other, it is important to offer a recurring advisory service and suggest reallocating part of their assets.

'For 'normal' clients who don't have sufficient resources to implement hedging tools, we will encourage them to gradually switch from equity to bond or market-neutral funds,' Mr Leung said. 'I think those funds with upside potential, but downside capped, will be very popular in the coming year.'

He said it was always necessary to think more about getting good long-term performance and a steady level of income.

Eddie Lam Yat-ming, investment director for Bank Consortium Trust Company (BCT), concurs with the sentiments. As a provider of MPF products, the firm focuses on balanced funds with a clearly calibrated scale of risk but, interestingly, is planning two new higher-risk single-country funds. The company was awaiting distribution approval from the SFC and MPF authorities, he added.

'The aim is to capture more investment opportunities for our members and to provide more choice,' Mr Lam said. He said the move was in response to a trend seen in the past few months of people switching from capital preservation or low-risk funds into Hong Kong equity funds.

Next year, BCT may offer other new funds, either index-linked, single-country or environment-related. 'I think it is a good development because the MPF portfolio is growing very fast with members' monthly contributions and the growth of the markets,' Mr Lam said.


Balanced funds use a selection of stocks and bonds designed to generate income and capital appreciation without excessive risk. Diversification limits losses in a downturn but, during a bull market, gains are less than for an all-stock fund.

Themed funds target investments based on specified themes such as technology, health care or energy. Funds with socially responsible themes like the environment, natural resources and water are attracting increasing interest.

Reits real estate investment trusts are traded like stocks and invest directly through properties or mortgages in shopping malls, apartments, hotels, warehouses and office buildings. Individuals are able to invest in a reit either by buying its shares or via a mutual fund that focuses on real estate.

Absolute return or hedge funds are generally used by institutions and high-net-worth individuals to gain returns not measured against a relative benchmark or index. Managers employ more aggressive tactics than for mutual funds, including leverage, derivatives and short selling. Hedge funds will also retain a percentage of the profits. There is usually an upper limit of 100 on the number of investors and a minimum investment of from US$250,000 to more than US$1 million.

Fund of funds is a mutual fund which holds stakes in several other mutual funds with a view to achieving greater diversification. Typically, the fees are higher because of the various expenses charged by the underlying funds which, in turn, invest in a wide variety of different stocks.

Single-country funds are limited to investing in the assets of just one country and can only put money into the range of financial instruments available in that country. The basic terms will be set out in a statement in the fund prospectus and this will be regarded as binding.

Guaranteed investment funds are offered by insurance companies and allow clients to invest in a bond, equity or index fund, with the promise of receiving a pre-defined minimum amount either when the fund matures or when they die.

Multi-adviser funds are run by more than one manager, each specialising in a distinct area. The idea is to make best use of the expertise of different professionals, rather than expecting one manager to have a comprehensive understanding of all the options available. As an example, the fund might invest in emerging Europe and Asian equities.