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Raymond Ma

GUARANTEED FUNDS ARE likely to remain popular, provided Hong Kong interest rates remain low.

'If fixed deposit rates remain low, guaranteed funds . . . will still have their place,' said SG Equity Derivatives senior vice-president Wilson Lee, speaking at the launch of its new Global Manager Guaranteed Fund, the first of its kind in Hong Kong. It is linked to three baskets of funds managed by different managers.

'Usually, those who invest in funds will compare their investment with the stock market. Last year saw a new trend whereby fixed-term depositors began to put their money into funds.

'We think that if the fixed-term deposit rate remains low, guaranteed funds will remain popular,' he said.

A typical guaranteed fund has a fixed life, usually of between two and five years, and offers participation in traditional equity funds. It guarantees that, no matter how the underlying fund performs, the redemption value will be at least equal to the amount of your original investment - a boon for investors at times of stock market volatility.

However, the capital protection is paid for through a reduced participation in the underlying fund.

Introduced widely to Hong Kong in mid-2000, guaranteed funds accounted for about 44 per cent of the fund industry's gross sales of US$8.3 billion during the first 10 months of last year. They made up 95 per cent of net sales of US$3.81 billion, which means many bought the funds, but few sold them.

SG Equity's managing director Raphael Blot said uncertainties in the stock market would also boost guaranteed funds' popularity in the coming year. 'Even though the stock market seems to be in a better shape right now compared to last year, you never know what can happen. Therefore capital guaranteed funds will still be a very good opportunity for clients to invest.'

However, Mr Lee believed better returns in the stock market would not directly translate into lower demand for guaranteed funds. 'It's a balancing act, and it doesn't mean that as soon as returns go up, nobody will buy guaranteed funds,' he said. 'If they go up, we can also come up with a better participation rate.'

He said the portfolio, linked to three funds - ACM Global Growth Trends Portfolio A (50 per cent), Fidelity European Growth Fund (10 per cent) and Mercury US Dollar Global Bond Fund (40 per cent) - should outperform others.

'Capital guaranteed funds launched so far have been linked to underlying indices, such as the S&P 500, HSI, Nikkei, or funds managed by only one single fund house. The new fund which links to a basket of some of the top performing funds is indeed a breakthrough.'

SG Equity's new fund features a higher participation rate in the underlying equity fund, expected to be about 60 per cent, compared to the 20 per cent to 30 per cent offered by other guaranteed funds. It will also lock-in profits on a quarterly basis.

The firm hopes this will enable it to achieve an annual return of 4 per cent to 7 per cent per year.

'The fund provides a high yield alternative to the low deposit rates with a 100 per cent capital guarantee through a quarterly lock-in-profits mechanism and helps investors secure profits under different market conditions,' Mr Lee said.

The fund will be managed by Lyxor Asset Management, a subsidiary of French bank Societe Generale.

The company hopes to raise anywhere from US$50 million to US$200 million from the issue, which began on Thursday and lasts until February 1.

The offer price is US$10 per unit.

But SG's optimism about the guaranteed fund's popularity is not shared by others in the fund management industry.

Data released by the Hong Kong Investment Funds Association (HKIFA) on Thursday revealed net investment in Hong Kong-authorised mutual funds plunged 85 per cent in November last year from October to US$125.05 million, due in part to waning interest in guaranteed funds.

Gross sales of mutual funds fell 58 per cent in November from the previous month to US$568.78 million, the HKIFA said.

Sales of guaranteed funds, which took off as bank deposit rates were slashed and equity markets headed south, nosedived 98 per cent in November to US$19.35 million from US$800.28 million in October.

Guaranteed funds were the leading mutual fund sector in the first 11 months of last year, accounting for US$3.7 billion or 42 per cent of total gross fund sales and 92 per cent of net sales, the HKIFA said.

In November, investors were seen switching money to bond funds which posted a 39 per cent increase in gross sales on the month to US$160.29 million, while gross sales of cash funds slipped 24 per cent to US$116.37 million.

However, a new form of guaranteed fund, called guaranteed hedge funds, could lead the next wave of retail investments in Asia, as money managers seek to balance volatility with upside potential.

Fund managers said guaranteed hedge funds had the potential to become popular among investors in Asia looking for stability and upside gain in the face of poor returns in regional equities.

Fund managers hope a guarantee would turn initial interest into committed investment, giving buyers a sense of security, while offering higher upside gains than traditional capital guaranteed funds.

Hedge funds have proliferated in recent months, with regulators in Singapore and Hong Kong warming to them.

But regulatory hurdles to the marketing of hedge funds pose a major challenge for the industry in Asia, especially as volatility risks have led to spectacular failures of hedge funds in the past.



Guaranteed funds may retain appeal