Rising interest rates led investors to redeem bond funds in first four months of 2014

Equity funds lead the pack with sales of US$13.8b in HK while concerns over rate rises prompt investors to redeem bond funds

PUBLISHED : Tuesday, 24 June, 2014, 12:31pm
UPDATED : Wednesday, 25 June, 2014, 1:43am

Fear of rising interest rates has led investors to redeem bond funds in the first four months of this year, with the net sales of funds in the city stumbling 37 per cent year on year, according to the Hong Kong Investment Funds Association.

This, however, was offset by investors' buying spree on equity funds, particularly those investing in the buoyant stock markets of the United States and Europe.

Terry Pan San-kong, vice-chairman of the unit trust subcommittee of the association, told the South China Morning Post that the outlook of local fund sales for the rest of this year remained positive due to stable economic growth on the mainland and the rising popularity of yuan funds.

"We are optimistic because the US and European economies are recovering. Mainland China's economic growth may slow from the previous year but it remains stable," Pan said.

"We should also note that China's effort to internationalise the yuan has led to the launch of many yuan-denominated funds, which are very popular with investors. All these factors would help us produce record sales this year."

Gross fund sales last year stood at US$71 billion, the highest on record.

The buying trend has continued in the first four months of this year, with gross sales gaining 1 per cent year on year to US$27.4 billion, driven mainly by stock funds, high-yield bond funds and emerging-markets bond funds.

However, the gross sales have been offset by strong redemption of bond funds and balance funds, which invest in a mixture of bonds and equities, during the period.

This has resulted in net sales dropping 37 per cent year on year to US$5.2 billion.

The redemption pressure, Pan said, was a result of profit taking by some investors and the fear that increases in interest rates in the US might hurt bond prices.

"The US has started to wind down its monetary easing policies from January. Its economy is on the way to recovery. All these have led to the fear that it would no longer keep the rates low to support the economy and so interest rates may increase," he said.

"But we should not be too worried about the redemption of the bond funds because many investors are selling them and switching to equity funds. This is why gross sales have risen."

Equity funds were the bestsellers in the first four months with gross sales of US$13.8 billion, representing 50 per cent of total sales. This was followed by bond funds with US$7 billion in gross sales and balance funds with US$5.6 billion. The rest are money market funds.