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SCMP Reporter

WITH EQUITY MARKETS around the globe taking a battering last year, retail investors have been forced to look for safer havens.

A majority of the theme funds took a sharp dip mainly because of the slide in the stock markets.

The South China Morning Post  Fund Manager of the Year Award 2000 is just weeks away, and fund managers say those funds which did not rely heavily on the Internet and technology stocks would be front runners.

With investors looking for safety, the focus has turned to guaranteed funds.

Guaranteed funds fever hit last week as Indocam Asset Management and Hang Seng Bank launched two such products.

The Indocam fund invests in European equities, while the Hang Seng has put its bets on the technology fund.

Cheung Ka-ming, assistant general manager of Hang Seng Bank and head of investment services, said that the technology sector was still hot and it was a more rational market now after the correction last year.

'Guaranteed funds are designed as low-risk products to target risk-averse bank customers,' said Sam Ip, head of the unit trust agency department at Bank of East Asia. Mr Ip said some banks found it useful as an entry-level product for building a customer base.

What, then, is a guaranteed fund and what should first-time investors know about it before throwing in their stakes?

A guaranteed fund assures investors either a full return, or more than 90 per cent, of their initial investment after a fixed number of years, depending on the fund. Most offer a two to five-year holding period. For example, besides a 100 per cent capital guaranteed technology fund, Hang Seng also offers a 90 per cent capital guaranteed fund.

According to Mr Cheung, the 90 per cent capital guaranteed return fund has more potential on the upside compared to the 100 per cent one, depending on the risk appetite of investors.

Mr Ip said the recent cuts in the United States interest rates and the fear of a prolonged global economic slowdown had stimulated interest from investors for this kind of fund.

'Guaranteed funds are very complex and were previously targeted at institutional investors, but fund houses are reaching out to the retail investors,' said John Lui, group deputy director at Allen Perkins, a financial consultancy company.

'This is because retail investors are becoming more sophisticated and from previous experience in 1997-98, it shows that market disarray turns investors to more stable investments such as guaranteed funds,' Mr Lui said.

Market uncertainties leading to investors seeking safe havens would seem attractive to lower-risk takers.

Halena Ng, executive director of Harris Fraser International, a financial consultancy firm said: 'When the stock market performs, you don't see this [many guaranteed funds]. Fund managers would think of ways to satisfy people who have cash and who are not sure where to invest.'

Bruce Chong, a director at Patterson Financial Services, an investment consultancy firm, said: 'Hong Kong investors are facing too many uncertainties and have suffered from TMT [technology, media and telecommunications] stock losses, therefore they are looking for capital protection.

'From the point of view of the fund houses and banks, the interest rate is continuing to fall so that the lending business cannot be run profitably. Therefore, they may prefer to switch those depositors to guaranteed fund investors, since the expected earnings shall be higher than the reward from the lending business,' he said.

Financial pundits explain that in the structure of a guaranteed fund a major portion of the money is put into sovereign bonds which yield a fixed return. The remainder is put into a more highly leveraged market.

'Hence, when the market gets bullish, it would mean that you get less upsides than if you had put the money in a non-guaranteed fund [of the same underlying equities],' said Peter Woo, head of investment at Towry Law.

Financial advisers say investors should find out about fund managers' investment strategies.

'Some fund managers adopt the bottoms up approach, whereby they visit most of the companies which they want to hold stakes in,' said Mr Chong.

He also said that the fund-of-funds approach would mean higher administration costs due to more layers of fund managing.

Financial experts said the prevailing low interest rates in Hong Kong resulting from the recent chain of interest rate cuts by the US Federal Reserve would mean that a major chunk of the investment would need to be put into bonds to yield the capital return.

'If the current interest is higher, you can set aside more money for equity investments,' said Mr Lui.

There is a double-edged sword in lower interest rates.

Referring to the Hang Seng Guaranteed Fund, Mr Cheung said given the shorter product life cycle of technology products and high movements in the industry, it has a two-year fixed investment period.

On an average, the redemption period can range from three to 10 years depending on the fund, said Ms Ng of Harris Fraser, but advised that investors should try not to commit to a long term. Investors should consider the duration of the fund as it would lock up the capital and on rainy days, investors would find themselves caught out, she said.

Conversely, if the duration was longer, fund managers had more flexibility and could be more aggressive in selecting their stocks, which might bring about higher potential returns, Mr Chong added.

Ms Ng said that if the guaranteed fund performed well - more than 12 per cent return - then the market was good and investors should get out and move into equity funds. Hence, investors need to take note of the back-end load, that is, the penalty charges if you were to redeem the investment before the maturity date.

Mr Woo also advised that investors should be cautious as some fund providers did not guarantee capital return if investors withdrew the money prematurely.

These penalties tended to be higher during the initial years, with some as high as 8 per cent to 9 per cent of the asset fund in the first year, said Ms Ng.

'One-and-a-half to 2 per cent annual fees is reasonable, other than that it is a rip-off,' said Ms Ng. She added that investors should find out if the returns estimated by the fund providers was net of the investment fees.

'Don't expect too much [in returns] from these funds. It may be suitable for those who are close to retirement, and who are afraid of taking chances, as they cannot afford to lose their savings and they don't have the time to wait for the market to come back,' Ms Ng said.



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