Investment funds record 31pc decline in net inflows

Profit taking on equity positions mounts on rising valuations

Net inflows into Hong Kong-approved investment funds in the first five months of the year were 31 per cent lower than a year earlier as investors exiting equity funds, especially mainland plays, partly offset an increase in new money.

The Hong Kong Investment Funds Association said gross fund sales totalled US$15.8 billion in the year through to May, up 24.7 per cent from the same period last year.

However, investors in the same period pulled US$13.6 billion out of funds, leaving fund managers with a net inflow of US$2.2 billion, compared with US$3.2 billion a year ago.

Profit taking on equity fund positions was the principal culprit, the association said, with US$10 billion in redemptions in the five months, up 56 per cent on the year.

Redemptions from Greater China funds, which invest in at least two of the mainland, Hong Kong and Taiwanese markets, more than tripled to US$2.46 billion.

This mirrors the trend among fund investors around the world, who have been cashing in their Greater China funds in record numbers, taking profit on the surge in share prices, and also showing concern over high valuations and expectations that Beijing might impose additional market-cooling measures.

In May, regulators tripled the stamp duty on domestic stock trades, sending the Shanghai Composite Index crashing 22 per cent in under a week.

Asia, excluding Japan, emerging markets and sector-specific funds also registered significant redemptions.

Many of these fund types enjoyed strong net inflows last year.

Equity funds overall saw a 15 per cent increase in sales for the first five months to US$12.1 billion.

'People only really started investing in the mainland market last year, so they have been building up their positions,' said Gerry Ng, the association's vice-chairman and a regional managing director at Baring Asset Management. 'Average returns on mainland funds last year were about 60 per cent, so people made a reasonable amount of money there last year.'

Bond funds had a strong start to the year, with net sales rising 58.9 per cent to US$435.89 million. Emerging market bond funds saw the strongest net sales.

The number of funds available to Hong Kong investors has been climbing steadily to nearly 2,000.

While some fund types, such as guaranteed funds or hedge funds, have fallen out of favour due to higher returns from simple equity offerings, there are other products in the industry pipeline to meet the territory's ageing demographic.

'One area that is not served well enough is funds for retirees,' said Elisabeth Scott, chairman of the fund association and a managing director at Schroder Investment Management. 'They're interested more in steady income, not just capital appreciation. I think there will be more on offer in this area.'

The association estimated that about 20 per cent of Hong Kong investors have money in funds, up from 18 per cent in 2005 and only 4 per cent in 1999.