Last year was all about bonds. Hong Kong investors overwhelmingly put their cash into debt funds, particularly those focused on high yield.
Now 2013 is shaping up to be the year of the balanced fund, also known as multi-asset.
The funds invest in everything: bonds, equities and commodities, property and the like. But the focus is on bonds and dividend stocks. They are, in other words, income funds, sitting somewhere in the risk spectrum between high-grade bond funds and dividend-focused equity funds.
Alex Boggis, the managing director of Aberdeen Asset Management's Hong Kong office, says the move to balanced funds reflects investors' desire for income. Previously, people bought a lot of bonds. Now, they buy something a little more diversified, adding a little bit more risk.
"Whenever you go to a bank, you can see what they are selling is multi-income balanced funds. It's all about income. Are they [investors] saying, 'I want a balanced fund?' No, they are saying, 'I want income,'" Boggis says. "Over the past couple of years, money has gone into income assets, such as bonds, and now people are switching to balanced funds.
That may sound dull, but balanced funds are a big hit. Data supplied by the Hong Kong Investment Funds Association shows balanced funds have seen the biggest fund inflows of any fund category this year, drawing in more than twice the net new money of debt and equity funds combined (see graph).
Sally Wong Chi-ming, the chief executive of the HKIFA, says: "In the past, mixed-asset or balanced funds seemed too boring. Now, in general, after the global financial crisis, the whole approach has been much more focused on risk management, as well as diversification."
The interest in balanced funds partly reflects the fact that central banks' money-printing programmes have, in recent times, raised the price for all assets. Buying a fund that invested in everything in such a context made sense. It also reflected investors' desire to ease out of bonds for something a little bit riskier and with the potential for higher return, reflecting a generally more optimistic outlook.
But something more specific happened as 2013 dawned that triggered a flood of money into balanced funds.
Grace Tam, a market strategist at JP Morgan Asset Management, says investors began to get very focused on the idea that central banks' quantitative easing programmes would end. This planted the idea that interest rates would start to rise eventually, and this would bring down the value of their bond funds.
There was no particular event or catalyst for this change of view. But Tam says Hong Kong investors have seen that the United States economy is improving, and factored that into their expectation that this would lead to rising interest rates and falling bond prices.
"When the economic data improved, people started to think of the interest rate environment and a Fed exit," she says, "and rising interest rates are negative for fixed income."
Such views, of course, were vindicated last week, when the chairman of the US Federal Reserve, Ben Bernanke, signalled the end of quantitative easing, scuttling bond markets.
It says something about the sophistication of Hong Kong investors that people will correctly predict a nuanced and complicated event in public markets, and prepare for this with a subtle change in investing strategy - a move out of bonds and into balanced funds.
Balanced funds have also provided a way for investors to edge back into equities. Balanced funds are normally about one-third stocks, so that the funds let people get some exposure to stocks but in a conservative, diversified fashion.
Bruno Lee, the regional head of retail sales at Fidelity, says: "It's a little bit more psychological."
Investors could sell a third of their bond holdings and buy pure equity funds, but they seem to prefer shifting their entire bond holdings into balanced funds, with about a third in equities. The effect is the same from an asset-management point of view but is easier to stomach for nervous investors, Lee says.
Hongkongers are still avid bond buyers, however. While momentum clearly shifted from fixed income to balanced funds at the start of the year, fund flows into debt are still strongly positive. As recently as April, Hongkongers put US$620 million in new cash into fixed-income funds, the HKIFA says.
Last week's announcement by the Fed does change things. It definitively biases markets towards equities and away from bonds. The Fed may take until 2015 to raise interest rates, but few are going to sit on a low-yield government-bond fund for the next two years waiting for the interest rate cycle to turn inexorably upwards.
Wellian Wiranto, an Asia investment strategist at Barclays, says: "We know the writing is on the wall. In the end, we will have an increasing rate environment. It's a matter of when it will happen … do you want to be earlier than the market or move after the fact?"
That suggests a tilt towards equities, implying that the great intermediate investment, the balanced fund, may shortly fall out of favour. In other words, while investors have lacked direction in recent months, now they have it, and it points to equities and not bonds.