HSBC Asset Management is launching its first capital-guaranteed mutual fund of 2003 in a sign that interest among retail investors in Hong Kong is still focused on ultra-conservative products that will eke out a better return than bank deposits.

Sally Wong, executive director at the Hong Kong Investment Funds Association, says guaranteed funds dominated 2002, comprising of 60% of new fund sales, but not as absolutely as in 2001 when guaranteed funds made up 90% of sales. Fixed-income funds have been making a comeback.

"This year we expect that as long as interest rates remain low, guaranteed funds still serve a purpose for investors who would otherwise be depositors," says Wong. She notes last year, for 60% of guaranteed fund investors, it was their first experience with capital market products. Guaranteed funds have helped boost mutual fund penetration in Hong Kong from 3% in 1997 to 10% today.

Last year, HSBC Asset Management raised $1 billion from four guaranteed fund launches in Hong Kong. Thanks to the powerful distribution of its banking parent, the fund manager has been a leading player in the guaranteed fund market.

The IFA and market players see guaranteed funds remaining on top for at least another six months, given weak global markets and low interest rates. But investment managers last year began having to offer bells and whistles to keep the guaranteed fund assets rolling in, such as providing a regular coupon or dividend.

HSBC is now jumping on that trend, offering for the first time a guaranteed fund that pays out every six months over its four-and-a-half year life, says Bonnie Lam, director of business development. "Customers are now demanding regular income," she says.

The firm's latest is in line with industry norms on most aspects. It is offering a minimum 7.2% return at maturity, with 0.8% minimum payouts semi-annually. The underlying investment is a basket of five equities indices, the S&P 500, EuroStoxx 50, the Hang Seng Index, the FTSE 100 and the Nikkei 225, which reflects a broad expectation of global economic recovery.

About 94% of assets will be invested in zero-coupon bonds, 1-2% in an option leveraging the underlying index basket, and the remaining 4-5% are the firm's fees. The participation rate is a low 10-20% in the prospectus; Lam says 18-20% is likely. The low option ratio and participation rate reflect how difficult it is now for asset managers to make money off of guaranteed funds.