Investors rush into bond funds as they look for safe haven

BONDS traditionally have been perceived as a safe-haven investment, a place to put some of your money all the time and even more of it during hard times - like now.

Kelvin Blacklock, an assistant director at Schroder Investment Management (Hong Kong), argues that bonds could do better than equities as Asian economies begin to recover from the regional economic crisis.

'Bond holders stand in the front of the queue, over equity holders, and will therefore be the first to benefit in a recovery,' said Mr Blacklock, who manages Schroder's recently launched Asian Bond Fund.

Hong Kong investors, tired of the stock market's volatility, seem to have taken the bond message to heart. They have invested a net US$214.5 million into bond funds in the 14 months to August, or 80 per cent more than the net $119.25 million they put into Hong Kong-equity funds, according to the Investment Funds Association.

However, many of these new bond-fund investors might not fully appreciate the substantial differences between buying into bond funds and buying individual bonds.

Bond funds can own hundreds of bonds, so investors get a diversified portfolio and professional management. Interest receipts can be reinvested, and the minimum initial investment usually is not too arduous. The Schroder fund requires a minimum subscription of $1,000.

Bond funds, however, offer fewer guarantees than individual bonds. Because money managers such as Mr Blacklock regularly buy and sell the bonds in their portfolios, bond funds do not mature. Investors do not get a fixed income stream, and it is possible, if the bond-fund holding is sold at the wrong time, to lose some or all of the initial investment.