Low interest rates fuel shift into investment funds

Retail fund sales rose to a record last year, with fund managers saying the strong performance would continue in 2013 because of the low interest rate environment.

Sales of investment funds in Hong Kong in the first 11 months of last year reached US$51.4 billion, surpassing the previous record of US$45.5 billion for the whole of 2007.

Lieven Debruyne, the chairman of the Hong Kong Investment Funds Association, said sales could amount to US$55 billion for the whole year.

This is in contrast to the fortunes of the stock market, which saw its average daily turnover last year drop 23 per cent to HK$53.85 billion.

Debruyne, who is also the chief executive of Schroders Investment Management (Hong Kong), said strong sales would continue this year as a result of low interest rates.

"When the bank interest rate is so low, it is natural for investors to look to invest in fund products to achieve a higher yield," he said. "However, we believe that it is important for investors to maintain a diversified investment portfolio."

Last year's sales, however, showed investors were not as diversified as they should be, with about two-thirds of all retail fund sales in the first 11 months being bond funds, worth US$34.8 billion. The growth was mainly driven by high-yield bond funds, which recorded a net inflow of US$4.3 billion.

Stock funds, the best sellers in 2007, were less popular. Only 19 per cent of all fund sales were stock funds, down from 84 per cent in 2007.

Redemptions of stock funds surpassed new buyers' investment, resulting in a net outflow of US$1.2 billion in the 11 months, compared with a net inflow of US$572 million in the same period in 2011.

Among the 16 stock fund categories, 10 suffered net outflows, including Greater China equity funds, which saw a net outflow of US$279 million in the 11 months.

The poor performance of the stock funds was in contrast to the strong stock market in the fourth quarter after governments around the world adopted monetary easing policies. This led to hot money flowing into markets, including Hong Kong, whose benchmark rose 23 per cent last year.

"This showed investors are not yet confident about investing in stock funds and are still worrying about the uncertainties," Debruyne said.

Investors prefer bond funds to equity funds because bonds usually have lower risk than equities but can still offer better returns than bank deposits.

Bruno Lee, the chairman of the association's unit trust subcommittee, however, warned investors to pay attention to the risks associated with bond funds.

"All bonds and bond funds are subject to the credit risk of the issuers, interest rate risks and currency risk," Lee said.

"In addition, for funds that have regular payouts, investors should consider whether the distributions include portions of the fund capital as well."