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SCMP Reporter

LAST year the Hong Kong unit trust industry posted two major records: the highest-ever sales and redemptions.

   The $4.5 billion gross sales reflect the industry's potential but the $3.9 billion funds redeemed underlined one of its major problems.

   The industry's growth clearly depends on its ability to attract new investors and retain them.

   Despite the records, it is estimated that only 3 per cent of Hong Kong people invest in unit trusts, compared with about 40 per cent in the United States.

     There are a range of reasons for the low investment rate but as Hong Kong has one of the highest savings ratios in the world it is clearly not an issue of how to save, but where to save and invest.

   The favourable tax treatment of unit trust investment funds was a major reason for the British and US breakthrough into the mass savings market.

   In Britain, Personal Equity Plans offer a shelter for investments to roll up free of capital gains and income tax. A fillip for the US industry was tax breaks offered under the 401k pension plans.

  Despite Hong Kong's generous tax regime, there are no fiscal benefits for an individual who decides to use a collective form of investment.

   The proposed Mandatory Provident Fund offers tax incentives for employers' contributions but nothing for the employee. This is a clear case of inequality which, if addressed, could provide much-needed fiscal stimulation for the industry.

   In his influential book, A Piece of the Action, Joseph Nocera describes how the US middle classes became the money classes.

   Companies like Fidelity Investments and Merrill Lynch were able to develop the market through an astute combination of higher returns on money funds than those the banks were offering on their savings accounts and added-value services.

   Attempts to replicate this strategy in Hong Kong were blocked by the Association of Banks which persuaded the Monetary Authority to impose a $50,000 minimum on local dollar deposits.

    Comparisons with Western markets are also flawed by some inherent social differences. As an identifiable middle class emerges in Hong Kong, these differences become less obvious, but they are still there.

    Hong Kong investors display elements of purse-clutching conservatism and a hair-rising appetite for risk. Local investors have shown more enthusiasm for buying sure-fire winners like flats and houses.

   They also like to invest locally - any recent initial public offering amplifies that point - in individual stocks than collective investments.

   In Britain, 65 per cent invest in funds exposed to the British markets while, in the US, the exposure is 90 per cent.

   Hong Kong investors appear more likely to choose their own portfolios of local shares and use unit trusts for regional or single country funds outside of the territory.

   Members of the Investment Funds Association manage about US$95 billion, of which about two-thirds originates from overseas.

   At present, about 40 per cent of the money is retail with the bulk of the remainder coming from institutions, such as pension funds and corporate treasuries.

   According to Andrew Lo, chairman of the Investment Funds Association, retail funds under management have been growing faster. The competition for market share is fierce and companies are keen to identify new ways of tapping into the vast wealth.

   The industry has been zeroing in on the local market through a joint marketing/distribution effort which takes into account the emerging middle class.

   Banks are in the frontline selling either their own or other unit trust ranges. There are also joint training programmes for staff to advise on unit trust ranges.

   The message about diversifying risk and not relying on one particular market or asset class is being spread.

   Low-cost savings schemes, 'safe harbour' money funds and cheap switching facilities are encouraging regular savings.

   Mr Lo said: 'Asia looks attractive because it has such a high savings ratio compared to the West and a rapidly growing wealthy middle class.' 



Unit trust records fall but investment rate low