Taiwanese investors don't fully grasp bond fund risks

Given major issues for Taiwanese bond funds in the past -- such as substantial redemptions in 2004 -- one might think investors would be well versed in such instruments. But that doesn't seem to be the case.

A survey released in early November by US asset manager Janus Capital found that investors in Taiwan do not properly understand the bond fund asset class and as a result often buy them for the wrong reasons.

The aim of the survey was to examine why bond fund investors decide to invest, their key investment criteria and their level of understanding of bond funds, and to identify the types of fund they invest in. Janus interviewed 400 people in total: 300 existing bond fund investors and 100 potential bond fund investors. The firm split existing investors into those who have invested within the past 12 months and those who invested over a year ago.

The top overall reason -- given by 64.3% of the existing bond fund investors -- for choosing bond fund investments was "lower risk", although the next most popular reason was because they provide higher returns than fixed deposits. Moreover, the biggest consideration (67%) when buying into bond funds is "risk", but again in second place (with 56%) is "potential capital appreciation".

Janus then asked whether these respondents understood the risk profile of their invested bond funds in general -- to which most (68.7%) answered that they do. The numbers varied when that question was split into different types of bond fund. For example, 83% of the government bond investors said they understand the risk profile of the bond funds they invested in, while only 54% of convertible bond fund investors said the same.

"The next thing we wanted to know was whether they really understand these investments," says Alvin Chiu, Hong Kong-based senior director of marketing for Asia-Pacific at Janus Capital. Hence, the next question was 'are all bond funds the same and generally low risk in nature?'

"We know this isn't the case," say Chiu, but 65% of all respondents agreed that they are all the same, while 20% said they didn't know. Clearly, then, these investors think they understand bond fund risks, when they do not, he says.

So it is perhaps rather worrying that the majority of existing bond fund investors (64.3%) have invested in emerging-market bond funds, followed by government bond funds (25.3%) and high-yield bond funds (22%). Of those emerging-market bond-fund investors, the vast majority (85%) bought the funds because of their high yield/return.

This is a lot higher than the 10.8% of investors that bought them because of their stable/lower-risk/fixed-period dividend, while only 1.6% said they bought emerging-market bond funds due to recommendations by financial advisers. As for potential bond fund investors, 61% were thinking of investing in emerging markets, the highest proportion of any regional type investment they were looking at.

Moreover, only a quarter of those surveyed appeared ready to listen when told about the high risk of emerging-market bond funds. Twenty seven percent said they would make a different decision if they were made aware of the higher risks and potential for capital losses.

Of course, one might surmise that since most respondents appear to have often dismissed the advice of financial advisers in the past, they may not be any more receptive to it in the future.

Other findings of the survey include that banks are by far the most popular channel for buying bond funds, followed by insurance companies. And, as for information on such assets, existing bond investors look to financial advisers most of all, while potential investors tend to rely more on word of mouth and internet research.

Janus concludes that the industry needs to focus more on educating investors about the risk-return profile of different types of bond funds. They also need to look beyond just 'yield' when they make a decision about which bond fund to buy into. 

It appears investors will be receptive to such advice: 6 out of 10 of those surveyed said they were interested in learning more about bond funds.

This is the first time Janus Capital has conducted such a survey in Asia, and the first time anyone has done such a poll in Taiwan on investors' perception and understanding of bond funds, says Chiu. The firm is considering rolling out similar surveys elsewhere in the region, he adds.

Janus offers three fixed-income funds in Asia-Pacific, including Taiwan: a US high-yield fund, a US flexible-income fund and a US short-term bond fund.