HONG KONG IS WIDELY recognised as the leading fund management centre in Asia, with the largest concentration of funds and fund managers. In this environment covering a wide choice of asset classes and investment themes, Hong Kong investors are able to cherry-pick their way through a long list of choices for the best performers. Standard & Poor's said Hong Kong-based mutual funds recorded a significant performance improvement in the first quarter of this year compared with the same period last year. The average return on Hong Kong mutual funds was 3.45 per cent, against a negative return of 2.63 per cent in the first quarter of last year. S&P said the best returns were delivered by equity funds, which were up 4.66 per cent in the first quarter. Despite this performance, markets have become more volatile recently. Investors have enjoyed positive economic and corporate news, but face concerns over interest rate rises in the United States, a 'managed' slowdown in China, rising oil prices and increased geopolitical concerns. Locally authorised funds subsequently dropped 2.37 per cent in the second quarter before making a tentative gain of 1.31 per cent in the quarter just gone. S&P's fund services associate Chua Boon Lee, responsible for funds research and portfolio advisory services in Singapore, said the global equity market rally last year began to show signs of maturing this year, and S&P found that investors in Hong Kong had become more selective on where to park their money. 'From the funds flow perspective, there is a discernible trend towards higher-risk asset classes such as Asia-Pacific and even Latin American equities,' Mr Chua said. The top performing sectors as measured by the respective median S&P sector returns in the 12 months to September were Property Shares Europe (plus 47.3 per cent), Latin America Equity (40.3 per cent) and Global Energy (39.9 per cent). Mr Chua said small capitalisation stocks were continuing to shine compared with several large capitalisation stocks. 'If the global small capitalisation companies continued to outperform this year, and if the present nine-month trend was to persist, this year will mark the fifth consecutive year that this asset class has outperformed its bigger brethren. Based on our examination of the portfolios covered by S&P, smaller stocks generally remain in favour although some fund managers have begun to shift up the capitalisation scale,' he said. S&P believes a trend is taking hold in Hong Kong where investors are becoming increasingly aware of their own risk profile, thereby allowing them to make informed choices on the extent to which they can scale the asset risk ladder. Mr Chua said as various asset classes took turns hogging the performance tables in recent years, it was S&P's belief that investors in Hong Kong had begun to take portfolio diversification more seriously. Instead of chasing after hot sectors, more individual investors were adopting a more balanced approach in assembling a funds portfolio that ran across different asset classes, occasionally injecting exotic versions into the mix to spice up their returns. 'Of course, the fast-improving domestic economy has had a significant impact on investors in Hong Kong being able to take on board more risks in their fund choices, but S&P believes the trend towards putting together a more balanced mix of asset classes is here to stay.' Hong Kong has the most open funds industry in Asia, thereby benefiting from the presence of the best funds managed by the largest and best houses in the world. Hence, the average sector performances of Securities and Futures Commission authorised funds are comparable to any other financial centre in the world. S&P holds annual fund awards to recognise and reward the hard work and efforts of professionals in the funds industry. The awards have come to be accepted globally as the performance standard against which fund managers and investment management groups are measured. 'Our methodology has been replicated in 19 regions around the world. Past performance is a major selling point for fund managers and an equally major buying factor for the consumer. Past performance is consistently cited in surveys as the single biggest component in the purchase decision,' Mr Chua said. While past performance is an important first step in successful fund selection, it is only the first step. S&P believes investors and their advisers need more than just past performance to decide whether a fund will consistently meet their needs.