HK investors flee Asia equity funds despite stock boom

Retail fund sales in Hong Kong boomed in the first half of the year, driven by strong flows into balanced and bond strategies, but investors ditched equities – especially Asia products – according to figures released this week by the Hong Kong Investment Funds Association (HKIFA).

The shift came despite a continued rally in regional stock prices. Why?

Stewart Aldcroft, managing director of markets and securities services and senior funds industry adviser at Citi, blamed what he saw as poor investment advice.

By contrast, Sally Wong, HKIFA chief executive, argued that it was down to investors being over-cautious and, in fact, not acting on advice they had received.

Net fund sales in Hong Kong nearly trebled to $4.8 billion in the six months to June 30, from $1.34 billion in the first half of 2016. The figure surpassed net sales for the whole of both 2016 and 2015, which stood at $3.1 billion and $3 billion, respectively.

However, equity funds had suffered net redemptions for 16 months on the trot until June, with $3.78 billion being pulled by Hong Kong investors in the first half of this year.

China and Asia ex-Japan strategies saw the biggest net outflows, shedding $931 million and $871 million, respectively. Investors pulled $355 million and $140 million out of Europe (excluding Eastern Europe) and US equity funds, respectively.

And yet global stock markets have been performing strongly throughout that time. US equities have continued to post record highs, having gained 18% since Donald Trump was elected US president on November 8. European and Asian equities have also prospered, (the MSCI Europe index by 19.40% and MSCI Asia Pacific by 20.53% this year as of July 31).

Bad advice?

Citi’s Aldcroft noted that Europe and Asia equity flows had not reflected these rallies. “Why are people pulling out from equity funds when markets are doing well?” he said. “This is a cause of concern for the industry. Investors are not getting the right type of investment advice.”

Some local banks simply chase the flavour of the month and tend to look at what has happened in the previous year rather than looking forward and conducting portfolio management, added Aldcroft. 

However, HKIFA’s Wong said market advice was sufficient and that investor hesitation was the main reason for the failure to capitalise on the market rally.

Advisers had told investors in Hong Kong that stock markets would rise on the back of the global economic recovery last year, she said, but they were not confident putting money to work, especially given the concerns about geopolitical risks at the time.

Investors were anxious in the run-up to France’s first-round presidential election on April 22, about a potential victory for far-right candidate Marine Le Pen. A further contributor to risk aversion in April was the fact that US economic data looked weaker than expected, wrote Richard Woolnough, fund manager for optimal income strategy at M&G Investments, in a note published on August 15.

Local investors often miss out on opportunities because they tend to lag market developments, Wong noted. That’s one reason why more investors have been putting their money in balanced strategies so that asset managers can allocate the money for them, she said.

Net sales of balanced funds totalled $3.09 billion for the first half of 2017 (and $1.6 billion in the second half of last year), compared to $1.05 billion of net outflows during the first half of 2016. First-half net inflows to bond funds were down 14% year-on-year but still stood at $5.58 billion.

Short-term outlook

One thing that Aldcroft and Wong agreed on was that investors in Hong Kong – and across Asia – tend to be overly short-termist.

Aldcroft said the low proportion of net sales to gross sales has been a consistent pattern over the years in Hong Kong. Net fund sales accounted for about one-tenth of the $44.09 billion of gross sales for the first half.

This pattern indicates huge turnover and that too many investors have short-term investment horizons and do not favour long-term buy-and-hold strategies, said Aldcroft. This is behaviour typical of investors across Asia, he added.

Asian investors tend to redeem their funds once they post gains and then find new opportunities, confirmed Wong. They like to actively manage their funds and have constant reviews, unlike investors elsewhere, who take a long-term approach, she added.

Hong Kong investors tend to adopt the same mindset for funds as they do for stocks, said Wong. The industry has a lot to do to make investors embrace fund investment as a long-term tool, she added.