IN THE HALCYON days of the early to mid-1990s a general belief among Hong Kong investors was that any investment that did not give a double-digit return overnight was not worth investing in. Okay, this philosophy was restricted to only a few speculative punters and is stretched a bit, but the very fact that some investors thought it was possible demonstrates their state of mind in those good old days. But things changed overnight - and this is not exaggeration - on July 2, 1997 when Thailand devalued its currency, triggering the start of the Asian financial crisis. The onset of the worst financial crisis the continent had ever experienced changed the investing habits of SAR investors. 'Investors have realised that their dream has collapsed. They have started facing the reality,' said Ernest Chan, a director at Convoy Asset Management. The reality for Hong Kong investors means that their investment strategy has to be more conservative and capital preservation the top priority. 'They have moved to bonds and guaranteed funds,' said Mr Chan, a good option under the present circumstances. Mr Chan recommends short-term bond funds as a prudent way of hedging investments, despite rumblings from some bond analysts that it is time investors get out of bonds. Noted New York-based bond fund manager Bill Gross last Wednesday said that the galloping bull market for bonds was about to end, even though analysts doubted there would be a flight from them any time soon. According to an interview with Reuters, Mr Gross, who manages the world's largest single bond fund and oversees US$302 billion in assets as managing director at Pacific Investment Management (Pimco), believes inflation will rise next year and that interest rates may do the same. 'There's little doubt . . . that the bond market's salad days are over,' Mr Gross was quoted as saying on Pimco's Web site. 'Four to 5 per cent annual total returns at best over the next several years should be expected.' Investors have plowed US$106.8 billion into bond mutual funds in the United States this year as the stock market suffered its third successive down year, leaving investors clamouring for higher returns. Bond funds gained about 11.6 per cent in 2000 and 8.4 per cent last year, and are up another 8 per cent so far this year, according to Lehman Brothers' US Aggregate Bond Index. In Hong Kong, so far this year, about 12 per cent of the money invested in mutual funds went into bond funds, compared with about 4 per cent two years ago. 'My recommendation to investors is that they can still go for bond funds because of the depressing sentiments and the outlook for the world economies,' Mr Chan said. Investors previously used to high double-digit returns have now to contend with low single digits, and then only if they are lucky with the selection of funds. 'Investors are getting more realistic these days. Previously, if you told them I have an investment vehicle that can produce 4, 5 or even 6 per cent returns in two years' time they would tell you that you are crazy, I can pick up 20 per cent returns overnight . . . but that has changed now,' said Mr Chan. To a rational, experienced investor, volatility is a more important factor to gauge before investing. 'A few years ago investors talked solely about returns, but now they tend to follow the dictum, high risk, high return, low risk, low return. Returns go hand in hand with volatility,' Mr Chan said. Another safe investment option that he suggests is guaranteed funds. Guaranteed funds have attracted more investment this year in Hong Kong than any other investment product. According to the Hong Kong Investment Funds Association, guaranteed funds received US$5.59 billion in net investment between January 2001 and May this year; and in July alone sales reached US$574 million. 'So far this year about 64 per cent of the investment has gone to the guaranteed funds. From this I can draw a simple conclusion that people in Hong Kong are happily investing in guaranteed funds,' Mr Chan said. Guaranteed funds invest the majority of their assets into fixed-income investments, with a small proportion of up to about 10 per cent invested in equity-linked investments. Fund managers then use a variety of hedging techniques to maintain net asset value. The guarantee-part of the fund tends to lie in the quality of instruments the funds are allowed to invest in, although in some cases the funds are guaranteed by the fund sponsors themselves. Their whole premise, however, is to guarantee the investor gets back 100 per cent of his assets or more, regardless of market conditions, plus whatever upside there is on the equity side of the portfolio. But these funds too have a catch - the higher the protection, the smaller the return. Mr Chan said all investors liked high protection, but the more protection you wanted, the less opportunity there was for higher gains. But they are not limited to boring, low-growth asset classes. There are choices of indices and asset classes you could be linked to. 'My first priority is capital preservation. A lot of investors are coming to us saying they want to protect their capital, they are not bothered about high yields,' said Mr Chan, justifying his bullishness on guaranteed funds. He suggests investors should look at short-term guaranteed funds, which give them the freedom of liquidity. 'This year, guaranteed funds have remained the investment theme of the year, the dominant asset class. Looking at 2003, depending on the pick-up in the US market, guaranteed funds and bond funds would remain the dominant asset class,' he said. Ernest Chan 1989: Worked as a valuer for a real estate surveying firm following graduation. 1991: Joined Standard Chartered Bank as manager of the re tail banking division. 1994: Moved to Chekiang First Bank as commercial bank ing manager. 1997: Joined Convoy Asset Man agement as the director of its product and research department.