Market volatility and risk aversion in the second half of 2011 saw absolute yearly bond fund sales to Hong Kong retail investors overtake equity products for the first time this century.

Gross bond fund sales rose 39% year-on-year to $16.6 billion in 2011, accounting for 44.4% of the retail funds industry’s overall sales, reports the Hong Kong Investment Funds Association (HKIFA). That is the highest level this century and a rise from just 8.4% in 2001 (see chart).

Global bonds accounted for the lion’s share (37%), although that was a 4% drop from 2010. The biggest rises came for emerging market bonds, which increased 102% year-on-year to account for 23% of gross sales, and Asian bonds, which rose 88% and accounted for 33%.

In terms of net sales, Asian bonds funds increased by $925.4 million and EM bond funds $501.7 million. But global bond fund sales shrank $2.07 billion in 2011 and European bond funds also saw net outflow, ensuring net sales for bond funds declined 9.1% year-on-year in 2011.

However, on a net basis and similar to 2010, bond funds still accounted for 77.5% of net industry sales last year, compared with just 8.2% for equity funds.

That statistic came despite a sterling start to the year for equity funds, which the HKIFA reports attracted huge inflows in the first half.

While gross equity sales went up 14.6% year-on-year in 2011 to $16.3 billion – accounting for 43.5% of gross industry sales last year – net sales plunged 64.6% to $506 million.

Of the 13 equity categories, seven suffered net outflows. Greater China region equity, which has traditionally been one of the most popular fund categories, saw the highest net outflows at $566 million. That was followed by emerging markets equity funds at $301 million.

Of the six categories that registered inflows, Hong Kong equity funds came out on top by attracting $522 million, followed by emerging markets with $447 million.

There was also evidence of an increase in appetite for balanced funds: gross sales went up 2.7 times to $2.02 billion, while net sales saw even greater growth at 13.6 times to $981 million.

Kerry Ching, chairman of the HKIFA, notes that Hong Kong people were eager to put their money to work in a high inflation and low interest rate environment at the start of last year.

However she observes that fund sales lost momentum in the second half amid an increase in risk aversion over concerns about the eurozone sovereign debt crisis.

“Nevertheless, net outflows in September and October were attributable more to a drop in gross sales than a surge in redemptions,” Ching states, noting that the industry returned to net sales when global markets started to stabilise towards the end of last year.

While investors remained wary of equities in the second half, Hong Kong did not see heavy net outflows. “In fact, we’ve seen some equity sectors starting to attract net inflows of late,” she adds. “Sales of bond funds have gone from strength to strength and continued to attract inflows in a volatile market situation.”

On the outlook for this year, Bonnie Lam, vice-chairman of the HKIFA’s unit trust subcommittee, points to positive factors such as better-than-expected economic data out of the US, stabilisation of the eurozone crisis and further accommodative policies by central banks.

But she is of the belief that the market will continue to be subject to mixed signals as concerns persist about the prospects for a sustainable solution to European fiscal and financial difficulties.

The HKIFA has 67 fund management firms as full/overseas and affiliate members and 51 associate members including lawyers, accountants, trustees and others involved in the creation and administration of funds.