Bond fund outflows rise sharply in Hong Kong

Hong Kong investors redeemed $2.8 billion from bond funds in the third quarter, while allocating $1.8 billion to equity strategies, according to data released on Friday by the Hong Kong Investment Funds Association (HKIFA).

This came on the back of expected tapering of the US Federal Reserve's quantitative easing programme and solid performance from most global stock markets, says Lieven Debruyne, Hong Kong chief executive of Schroder Investment Management and chairman of the HKIFA. The S&P 500 was up 25% this year as of November 15.

The rotation of capital represented a sharp rise from the $169 million of bond fund outflows in the second quarter and a 244% increase in flows into equity strategies from $523.5 million. But developed markets were the beneficiaries, with Asian and emerging market strategies suffering redemptions.

International equity funds, which invest in global stock markets, recorded the biggest gains at $1.4 billion, followed by European equity strategies with $357.4 million and North American mutual funds with $352.7 million.

However, China equity funds saw outflows of $239 million, up from $139 million in the second quarter; and $137.7 million moved out of Asian single-market strategies (which excludes Japan, China and Hong Kong), up from $123 million. Global EM equity strategies also continued to suffer, with investors yanking $119.1 million, up from $91 million in the second quarter.

Debruyne cites poor performance in Asian stock markets, highlighting China in particular. The Shanghai benchmark CSI 300 is down 6.2% this year as of November 15.

One trend that is likely to continue is Hong Kong investors’ preference for balanced funds, he notes. Investors put $1.3 billion into multi-asset funds in the third quarter, bringing the total investment in such strategies in 2013 to $9.7 billion as of end-September. That compares with $1.4 billion in the same period last year.

Debruyne tells AsianInvestor: "For now, interest rates remain low, so having a fixed income feature [in underlying portfolios] is important. I think we will continue to see demand for [multi-asset funds]."

Historically, multi-asset funds have not big sellers in Hong Kong, says Bruno Lee, chairman of HKIFA's unit trust sub-committee. But uncertainty over the timing of the eventual rise in interest rates coupled with volatility in equity markets earlier this year seem to have led investors to rethink their portfolios.