HK investors rotate to bond funds, seek high yield

Investors in Hong Kong have cooled on Asian and emerging market equities but warmed to developed market stocks and high-yield bonds, finds the Hong Kong Investment Funds Association (HKIFA).

The city’s mutual fund industry recorded $27.4 billion in gross sales and $5.2 billion in net sales in the first four months of 2014. While gross sales were flattish year-on-year, net sales decreased 38%.

Terry Pan, vice-chairman of the HKIFA’s unit trust sub-committee, suggested the strong decrease was caused by redemptions from Asian and emerging market equity funds due to structural issues and broader geopolitical risks.

Bruno Lee, chairman of the sub-committee, said investors had digested the impact of US tapering from end of last year, and that retail investors were seeking higher-yielding income and growth-oriented funds invested in major developed markets.

Retail investors favoured equity funds, which recorded gross sales of $13.8 billion over the first four months, up 150% year-on-year to comprise 50% of total gross sales.

Investments primarily flowed into funds in developed economies. Developed European markets topped the list with net inflow of $2.1 billion, while international equity and sectoral funds attracted $1.8 billion and $700 million, respectively.

At the same time investors retreated from Asian and emerging market equities. Asia (ex Japan), Asia single-market and global emerging market equity funds saw the highest outflows of $551 million, $142 million and $124 million, respectively.

Meanwhile, bond funds saw gross sales decrease 42% to $7 billion, with net sales of $415 million, down 74% from $1.6 billion in the same period last year.

Investors are turning to riskier bonds. Net sales of high-yield fixed income funds increased 640% year-on-year in the first four months of the year to $1.59 billion, with gross sales of $4.37 billion to comprise 62% of total bond fund sales.

In April, bond funds accounted for 34.4% of total gross fund sales in that month, up 11.5 percentage points versus the first quarter, while equity gross fund sales in April comprised 40% of gross sales, down from 53.9% in the first quarter.

Pan said yesterday that the rotation to bond funds had continued in recent months as developed market equity growth had weakened, prompting investors to turn to more conservative securities and become more interested in high-yield strategies.

Balanced funds experienced outflow this year, with gross sales declining 36% to $5.6 billion and net sales decreasing 96% to $247 million, from $5.9 billion in the same period last year.