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SCMP Reporter

It sounds like the ideal investment vehicle: a fund-management house puts together the building blocks of specialist funds to make an umbrella product covering a region or the world, giving steady returns. Retail clients can tuck the product into their portfolio and forget about it. They know changes in allocation among the funds will be made over time by a professional to meet changing winds across markets.

 The only decision that clients need to make is when to get into it and when to get out.

 But Hong Kong investors are not buying it. At least not yet. Many big houses have fund-of-fund products. But they tend to be gathering dust in forgotten corners of their ranges.

 HSBC Asset Management and Dresdner RCM Global Investors have fund of funds in their line-ups but do not actively market them.

 'There is nothing wrong with this fund. It is just the changing appetite of investors. They would rather go into a fund instead of a fund of funds,' said Liza Ding, executive at HSBC Asset Management.

 Jardine Fleming Asset Management went a step further from the soft-sell approach. In December, it closed down its two fund-of-fund products, the Asian Growth Portfolio and the International Growth Portfolio.

 The Asian product had respectable average annual gains of 17 per cent since its 1995 launch, while the international vehicle averaged gains of 12.5 per cent, said Sandra Lee Yuen-man, Jardine Fleming's head of brand development and strategic planning.

 Despite that, when they were closed the two funds had just US$5 million between them.

 'There wasn't a lot of interest from our clients,' Ms Lee said. 'I think fund-of-fund products tend to appeal to clients who are very passive and who want active management and either don't have the time or knowledge to do it themselves.

 'People in Hong Kong tend to take a more active approach in managing their money. It sounds like people actually prefer to do their own asset allocation and listen to our advisers and be on top of things rather than to go with the more passive investment route.'  Investors might have also wondered if they were getting value for money, said James Campion, director for unit trust business development at Schroder Investment Management, which does not have a fund of funds in its Hong Kong range.

 'There is a perception, and in some cases it is reality, that there is an element of double charging,' he said.

 Mr Campion was referring to a house charging an annual management fee for a fund of funds while there were similar fees built into the underlying funds, eating into an investor's return.

 Houses might also run the funds with an eye more on keeping volatility low rather than the outright returns retail investors usually sought, he said.

 But investors had been canny in understanding that they might not be getting the best deal if they chose a fund of funds made up from one house's building blocks, said David Chapman, senior manager of the asset management division at investment advisers Towry Law.

 'People realise this, so there wouldn't be demand for a [Jardine Fleming] fund of funds or a somebody-else fund of funds,' he said.

 Towry Law has built its own model portfolios from funds across a range of houses. They have been popular with clients seeking a close guiding hand for their investments.

 'It means they don't have to think about it at all. They are getting professional management in a diversified, very serious, fashion,' Mr Chapman said.

 Rothschild Asset Management is one of the few big houses to acknowledge that investors look for diversification across different companies when they buy funds of funds. It offers a wide choice in its Five Arrows Private Portfolio Service range. The approach is not to just pick the best-performing funds, but also to strike a balance between aggressive and conservative investing styles.

 Even though the reaction to funds of funds has been lukewarm in Hong Kong so far, veteran fund manager Christopher Day is betting that will change.

 In 1997, he set up boutique house, Pacific Chartered, to specialise in funds of funds. The house looks for consistency and performance when selecting funds, and allocates assets based on where it believes the most promising markets are, rather than closely following benchmarks.

 Pacific Chartered has seen funds under management go from $13 million in January last year to $28 million a year later. While that is still small beer, Mr Day believes the arrival of the Mandatory Provident Fund this year will provide an extra growth kick. He points to the introduction of 401(K) personal pension plans for United States workers as a precedent, which turned fund of fund managers, or 'asset wrappers', into a key sector in the country's fund-management industry.

 Mr Day said: 'They [US workers] suddenly realised that the tough bit was: 'Which markets do I invest in and how do I do it?' So multifunds, or funds of funds, suddenly became very attractive because asset wrappers did asset allocation and fund selection.'  Letting a professional do the asset allocation makes sense, he said, because fund-management companies tended to push particular markets only when they had performed well, which might not be the best time to invest. And while these companies might be good at advising investors on buying into particular markets, they rarely sent out sell signals.

 Rather than pay extra for the service, investors who switch among funds could actually save money on initial and management charges if they used Pacific Chartered, Mr Day said.

 'When you are doing the investments over time it is costing you an absolute fortune. With one of these portfolios, you pay the sales charge once, then all the interchanges in the middle are free,' he said.

 Pacific Chartered uses its bulk orders to negotiate hefty discounts on annual management fees from fund houses when it buys their products. In one case, the reduction was from 1.75 per cent to 0.5 per cent.

 Initial charges are also drastically cut back on the underlying funds it uses, from a standard 5 per cent to below 0.125 per cent.

 All the discounts are put into the portfolio to improve performance, rather than being pocketed by the company.

 Pacific Chartered's reward for its labours is a 1.5 per cent annual fee and a 5 per cent purchase fee.



Ideal investment vehicle that gathers dust