High-yield instruments draw interest

PUBLISHED : Thursday, 18 September, 2003, 12:00am
UPDATED : Thursday, 18 September, 2003, 12:00am

Investors are slowly regaining their appetite for moderate risk

HSBC Asset Management has observed a gradual increase in investors' appetite for moderately risky instruments in the past year.

Sandra Lee, director, head of retail, marketing and product development for HSBC Asset Management, says along with improved general sentiment toward investment markets, a 'healthy portfolio diversification process' is under way.

'At the beginning of the year, investors in general were very risk averse,' she says. 'They were holding a lot of cash. In the past year, they have moved into high-yield products like guaranteed products and bond funds. Since March, what we have seen is an improvement in investor sentiment and a moderate increase in risk appetite.'

In the bond sector last year, HSBC saw good demand for United States treasury products. This year, there have been strong inflows into Asian bond funds.

'People like the Asian growth story but want to capture it in a more high-yield and stable manner,' Ms Lee says.

Asian bond funds typically invest in a mix of Asian corporate and government bonds.

Ms Lee emphasises the importance of appropriate diversification in building portfolios.

'I think investors are starting to understand now that it is very important, when they look at their strategy and portfolio allocation, that they do it with a building-blocks methodology.

'The first step must be capital preservation: how do I preserve my hard-earned money? For capital preservation, there are quite a few choices in the fund range.

'Then the more growth-orientated, looking to increase their wealth, can take on higher risk. Right now we have seen people diversifying back into equities. In particular, we like Asian equities.'

As the Asian stock markets show some signs of a bounce, investors are beginning to seek some exposure to selected markets, Ms Lee says.

'We are not talking about big volumes yet, but there has been a general increase of confidence in Asian equities. In particular, we have seen strong inflows into our Chinese and Thai equity funds.'

Portfolio diversification - ensuring that not too many investment 'eggs' are kept in one narrow 'basket' or sector - is key to ensuring a stable portfolio, Ms Lee says.

Asset allocation, or choosing which countries, markets and instruments to invest in, is another central investment plank to ensuring stable long-term returns.

'It is also important to have realistic expectations,' Ms Lee says. 'Our view is that the good old days of two-digit equity returns are over. Our expectation in terms of global equity returns in the long run is between 7 per cent to 8 per cent per annum. For global bonds it is about 4 per cent to 5 per cent per annum.

'I think we are seeing a convergence between the two, and returns are going to be single rather than double digit.

'Asia might turn out to be the only anomaly in terms of generating higher returns, but the volatility might be higher.'

Ms Lee warns investors against trying to pick a good time to enter markets as they begin to recover their faith in Asian stocks.

'Because markets have moved, investors have become a little more confident, so they are rounding out their portfolios to make them more efficient. But the thing to note is it is extremely difficult to time the market and people normally get it wrong.

'We emphasise the importance of having a diversified portfolio. That way, you are well positioned when markets do turn, so when the bull market does come, you are not left holding cash.

'We believe that markets will stay volatile and might correct in the near term anyway after the rally, so if the markets do turn you still have your capital preservation and you are able to hedge out some of the risk in terms of market volatility.

'In terms of overall strategy, our advice is that stock-picking is still key because there will be opportunities but they might not apply across the board.'

HSBC's guaranteed funds are in strong demand in the current environment. The group recently launched the Greater China Bonbon Capital Guaranteed Fund. Provided investors hold their units for the full 4.75 years, HSBC will waive subscription and redemption fees. They are guaranteed a 108.2 per cent return on their capital at the end of the period.

'This fund appeals to conservative clients who like regular income. It is for investors who don't want to lose even a dime, and also those looking for a deposit alternative with some upside,' Ms Lee says.

'This fund pays out regular income every six months, and it gives an additional bonus return based on markets in the Greater China region - from Hong Kong, Taiwan and China.'

The bonus return is calculated according to a basket of market indices.

Another HSBC product, the HSBC Asian Bond Fund is a little riskier, but is also attracting good investor inflows, according to Ms Lee.

'This appeals to investors who want to capture the Asian growth story but with a lower level of risk [compared with equity funds]. I usually think of these clients as people who tend to buy solid, high-yielding stocks.'

The fund invests in Asian corporate bonds, which pay a yield to the fund passed on to investors.

Ms Lee says: 'Historically, the bond fund has paid out about 5.2 per cent per annum over the past four years and the total return has been about 12 per cent a year.

'This fund is quite suitable for people who do not necessarily need capital guarantee protection but who like the Asian growth story but want to be exposed to it in a lower risk fashion and want to have monthly income.'

Moving up the risk-and-return curve are HSBC's Asia Equity and Chinese Equity funds.

'In terms of the Asian story, China stands out. We like the economic growth story, the domestic consumption story and the corporate reform story. Liquidity from foreign investors is also moving in. So despite Sars and the global recession, China is still the destination of choice when it comes to foreign direct investment. It says quite a bit about the prospects of China.'

But Ms Lee says careful stock selection is particularly important in China and other Asian markets.

'We have seen quite good interest in our Chinese Equity Fund, where people prefer to let the fund managers pick the stocks and be able to access different opportunities as the market opens.'