Managers should note that, for the average investor, safeguarding and increasing capital is more important than beating a benchmark
When the stock markets are on a steady upward climb, it is easy to believe in the concept of traditional mutual funds. Buying and holding them should pay off over the long term, making your money outperform stock market indices and outstrip inflation.
Mutual funds bought via a regular monthly savings plan carry the added advantage of dollar-cost averaging, whereby months when the fund's net asset value goes down result in the acquisition of more units. These will in turn bear fruit when the fund goes up again.
So far so good, except when mutual funds hit a bad patch that drags on for years and the question has to be asked - is the traditional long-only equity fund an idea that has had its day?
While many funds can boast outperformance of their chosen index, this cuts little ice with retail investors who are more likely to compare a loss-making fund with what they would have if they had left their money on deposit in the bank. At the very least they would have what they started with in the bank.
'Retail investors tend to focus on absolute return and do not use this concept of outperformance of the benchmark,' said Sally Wong, Hong Kong Investment Funds Association executive director.
The dominance of guaranteed funds and fixed-income funds in fund sales over the past two years is a clear indication that, for the average small investor, the emphasis is firmly on capital preservation. Clearly, managers of conventional long-only equity funds need to take into account their retail clients' drive for an absolute return if they are going to tempt investors back.