Hong Kong retail investors have started this year by buying more Asia ex-Japan funds than China funds, finds the Hong Kong Investment Funds Association.

Between January and February, net retail sales for Asia ex-Japan funds, as calculated by gross retail sales minus gross retail redemptions, outpaced China funds with net inflows of $293 million and $201 million, respectively.

This stands in contrast to fourth-quarter data, when Asia ex-Japan funds saw net redemptions of $78 million, and China net redemptions of $5 million.

The reversal comes as Asean funds experienced the best returns out of the wider Asian region. In the year to April 2013, Philippine equity funds were the best performing funds sold in Hong Kong with a return of more than 50% in US dollar terms. This was followed by Thailand equity funds with 37%, and Malaysia and Singapore equity funds at 26%.

But China equity funds returned less than 4% during the same period, according to Morningstar data.

HKIFA’s survey falls in line with Bank of America-Merrill Lynch’s fund manager survey published last week, which found that money managers have become increasingly bullish on certain Asean countries at the expense of China.

China’s economic growth slowed to 7.7% on a year-to-year basis in the first quarter, down from 7.9% in the fourth quarter of 2012.

Bruno Lee, unit trust subcommittee chairman for the HKIFA, notes Asean funds have performed strongly on the back of healthy economic growth and political stability, but he questions the sustainability of the rally and reminds investors to remain cautious.

To a lesser extent, Japanese equity funds also gained in popularity among Hong Kong retail investors on the back of the election success of Japan’s new prime minster Shinzo Abe. A net $13.2 million in redemptions for the fourth quarter was reversed to $21.93 million in inflow during the first two months of the year.

The Nikkei 225 Index has rallied 42% since November 12 on a wave of optimism as Abe tries to lift the Japanese economy out of a decade of depreciation with his “three arrows” policy of aggressive monetary easing, fiscal stimulus and support measures to boost economic growth.

However Lieven Debruyne, HKIFA chairman, warns that while Japanese equities seem attractive, Hong Kong investors also need to factor in depreciation of the yen, which has fallen by more than 20% since its October peak, which will impact returns if unhedged.

Japan equity funds returned 17% in US dollar terms in the year to April 2013, Morningstar data shows.

Meanwhile, the much-touted great rotation from bonds to equities is still not showing any signs of emerging, rather the shift has been from fixed-income to balanced strategies.

Net retail sales for managed funds, which stood at $380 million for the second quarter of 2012, jumped to $2.8 billion for the first two months of this year. Managed funds now account for 72% of overall retail net fund sales, from 8% in the second quarter of 2012.

That has come at the expense of bond funds, which dominated the market with 85% of funds sold (worth $3.2 billion) in the second quarter of 2012 but saw this shrunk to 18% of overall funds during the first two months of 2013 ($690 million).

Multi-asset strategies may continue to benefit from the recovering, but still fragile, global economic environment, aided by upsides such as the labour market recovery in the US. But geopolitical risks in North Asia and the eurozone debt crisis could create problems down the road.

“While the appetite for risky assets may have started to come back, we won’t expect to see a huge spike of sales in these funds in the short term,” says Lee.

“In the meantime, the focus would probably continue to be on yield-generating products, especially those which can enable investors to capitalise on the upside that economic recovery brings, and at the same time offer some downside protection to brace market volatilities.”

Overall, net sales of all retail funds in Hong Kong reached $3.92 billion for January and February, down from $4.38 billion in the previous quarter, although the HKIFA noted that sales in February were affected by the Chinese New Year holidays.