Small investors eschew equities for security of capital guarantees

Investors tired of the rocky ride in long-only equity funds in recent months are increasingly turning to funds that offer built-in assurances that their money won't be lost if the markets see a further dip.

Hong Kong's stock market, along with those across much of Asia, went into sharp decline in mid-May. Although key indices have regained some ground in recent weeks, the Hang Seng Index remains some 6.7 per cent below its early May highs while the H-Share Index is down about 9.9 per cent. Renewed fighting in the Middle East last week added further volatility to the market, driving gold and oil prices higher while stock markets fell.

That has hurt local retail investors, whose portfolios have a notoriously heavy weighting towards equities, and money managers say an increasing number of them are looking for a safer way to enter the markets going forward.

Sandra Lee, who runs Asian retail structured product and equity derivatives marketing at SG Securities, said investors were looking for downside protection as well as some level of guarantee on their principal investment.

'We are seeing much more interest in structured products, especially anything with a principal guarantee built in,' Ms Lee said. 'A lot of investors are now learning that what goes up can also come down, and they are looking for more protection. We only wish they had started buying more protected products at the start of the year when we began talking about higher volatility.'

Lyxor, the fund management unit of SG Securities, late last month began offering a fund that takes both long and short positions in Korean equities while guaranteeing a 6 per cent return plus 100 per cent of the principal investment after three years.

Capital guaranteed funds are one of the more common products that offer such protections while still benefiting from market gains. Other funds offer to lock in profits.