Top 10 funds available in Hong Kong

These experts' picks offer good returns with low fees, writes Jasper Moiseiwitsch

PUBLISHED : Monday, 08 October, 2012, 12:00am
UPDATED : Sunday, 07 October, 2012, 12:44pm

Invest, invest, invest. This is the repeated refrain from financial planners and related advisers. Investing and re-investing delivers the magic of compounded returns. It also creates a discipline - people will be less able to fritter their cash if it's locked up in a fund.

But, for those who wander into the nearest bank branch with a vague plan to buy a fund, you might want to consider what you are getting into.

Money Post surveyed financial planners and private bank investment specialists to get their top fund picks. The criteria for selection were low fees, strong returns and good governance.

Fees are important. One might think, 1 per cent here or there won't make much difference, but in fact the impact on long-term compounded returns is dramatic.

"Fees have shown to be the best predictor of long-term returns … regardless of past performance. For example, a 3 per cent sales charge and 1 per cent annual expense ratio for a bond fund when the interest rate for a 10-year Treasury bond is around 1.6 per cent would be really bad," says Tony Noto, a Shanghai-based financial planner.

Performance is another issue. There is a whole body of thought that says that stock picking or other forms of active investing is folly, and that people are better off to choose a low-fee fund that passively tracks an index. Others say a skilled fund manager can add a lot to returns.

There is a bias in the industry towards actively managed funds, as these tend to have a higher selling commission. Your financial planner or bank-branch adviser is much more likely to steer you towards an actively managed fund with an upfront charge of 5 per cent than, for example, an exchange traded fund (ETF), which only comes with a brokerage fee of about 0.25 per cent.

Nevertheless, active funds have their place, and this survey includes both styles of funds.

These are not a recommendation to buy a particular asset. You, as an investor, have to make your own choice about what you want, with all the risks involved. The funds here offer some of the best returns and governance for the fees charged, compared to equivalent funds.

Tracker Fund of Hong Kong (2800) The first ETF to hit Asia outside of Japan. It was created from the Hong Kong government-led massive intervention in the local share market in 1998, at the height of the Asian financial crisis. The government launched the fund to sell the shares.

The fund very efficiently does its job of tracking the Hang Seng Index - it has one of the lowest tracking errors seen among Hong Kong ETFs. The fund physically owns big chunks of the stocks underlying the index, which means it does not have to rely on derivatives or tricks to replicate the index performance, or complications like dividends payments. It's fairly simple and transparent - and it's cheap: expenses are just 0.15 per cent annually.

ABF Hong Kong Bond Index Fund (2819) This ETF holds Hong Kong government and quasi-government bonds (for example, MTR Corp debt). The fund fact sheet indicates a yield of just 3.6 per cent - but the management fee of 0.12 per cent is cheap. It gives exposure to Hong Kong government bonds that offer some cover against inflation, and with very low risk of default.

The fund works for investors who want exposure to safe bonds without losing their returns to manager fees.

ABF Pan Asia Bond Index Fund (2821) Another ETF, this one comprising Asian local currency debt. It's the same story as above - cheap and simple. The assets are riskier than above, but gains tend to be higher. The fund reported returns of 6.45 per cent in 2011. Asian currency bonds are volatile as they involve steep currency risks. But if this is the exposure you seek, this fund offers it, and for a low fee (total expenses are just 0.19 per cent).

Pimco Total Return Fund The world's largest bond fund focuses on government and government-connected issuers from around the world. Its annualised return for the past five years was 7.57 per cent, thanks to the fund's ability to invest in high yield securities, including emerging market debt of wide-ranging currencies. Management fee is 1.4 per cent.

The fund is also heavily invested in mortgage-backed securities which are benefiting from the United States Federal Reserve's current round of quantitative easing. (See Talking Points, page six.)

Value Partners Classic Fund The fund invests in Asia Pacific stocks with a focus on China equities. Returns are volatile year to year, but it has generated an average annualised return of 16.1 per cent since inception, in 1993. The management fee is 1.25 per cent, and a performance fee kicks in if the fund meets certain benchmarks. The fund has climbed 17 times in value since launch, versus a 294 per cent rise in the Hang Seng Index.

Schroder Asian Equity Yield The fund holds an array of Asian blue chips that pay generous dividends. As of end-August the fund delivered a 20.46 per cent return for 2012, more than double that of the MSCI All Country Pacific Index, an Asian equities benchmark. The management fee is 1.5 per cent.

Fidelity US High Yield Fund Hong Kong private bank investment specialists rate Fidelity's expertise in high-yield bond investing. This fund focuses on US securities. The yearly fee is low for actively managed funds, at 1 per cent, and for the past five years it has generated an annualised return of 8 per cent.

"The portfolio is highly diversified - 400-plus holdings - which reduces the inherent risk of the asset class," says a private banking product specialist.

Aberdeen Global - Asia Pacific Equity Fund The fund is a play on a rising Asia Pacific economies, and is exposed to all the volatilities of such growth. The annual management fee is a high 1.75 per cent. But it has performance to back that up: the fund has risen twelvefold since its launch in 1988, almost double the performance of the MSCI All Country Asia Pacific Ex Japan index.

Aberdeen Global - Select Emerging Markets Bond Fund The fund invests in some exotic debt, such as government bonds from Ivory Coast and Croatia. The average rating of its bond is BBB-, or the very cusp of investment grade, and it holds much that is below that level. The five year return is about 50 per cent, and regularly beats its benchmark, a JP Morgan emerging markets bond index. Management fee is 1.5 per cent.

First State China Growth The fund holds an array of China stocks, including those listed in the mainland (A and B shares). The management fee is high at 2 per cent per annum, but the fund has risen eightfold since its start in 1999 and usually outperforms its benchmark, the MSCI China.

Wyman Leung, an investment specialist for Altruist Financial, recommends the fund on the strength of the fund manager, Martin Lau. "His funds have a good and consistent track record, and this one stands out," says Leung.