Mutual fund sales show that many retail investors are remaining risk averse even as data reflects another month of strong returns for Hong Kong-authorised mutual funds in May.
But those who have been standing on the sidelines watching funds appreciate in the past two months have not missed out entirely, according to data compiler Lipper.
'Investors who did not participate in the rally over the last two months do not have to regret not being able to join the celebration. They will still most likely have a chance since equity funds will need true economic growth and strong corporate demand to back up a long-lasting rebound,' Lipper said in its latest FundMarket Insight report.
A gradual recovery with potentially sluggish economic data and poor corporate earnings would be the theme of the future, the report said.
Sales of mutual funds dropped in April, primarily because of the Sars outbreak, but they had picked up in May and June as health concerns eased and the United States economy showed signs of a turnaround, said Sally Wong, executive director of the Hong Kong Investment Funds Association.
But investors remained focused on bond funds and guaranteed products.
'Despite the rally in global equity markets in the past few months there has not been a surge in interest in equity products yet, probably because signals about the pace of economic recovery are quite mixed,' Ms Wong said.
'After experiencing the volatility of the equity markets in the last three years, investors tend to adopt a more cautious approach.'
She said investors had become more aware of the risk-reward trade-off, enabling them to make better informed investment decisions.
Hong Kong-authorised mutual funds rose an average of 5.84 per cent last month, the biggest monthly advance since the end of 1999, on the back of a 5.42 per cent surge in April, the Lipper data showed.
Greater China equity funds were the biggest gainers, rising 11 per cent, although all sectors ended in positive territory.
Value-orientated equity investors with an appetite for risk benefited the most, with funds invested in greater China, Indonesia, India and Thailand cruising higher. By sector, technology and biotechnology were the biggest gainers.
Equity funds invested in Asia-Pacific ex-Japan were the strongest performers, gaining an average of 8.28 per cent against 6.5 per cent for their European counterparts and 5.75 per cent in North America. Funds invested in Japan were the worst performers among equity funds.
Strong gains in risky markets indicated that investors were still wary of valuations and were not interested in stocks with high price-earnings ratios, Lipper said.
The economies of Asian countries, including China, India and Thailand, had all been growing, making their stocks cheap compared with equities in Europe and the United States. Many Asian companies were also paying dividends, increasing their allure.
'This, however, does not mean that these single market equity funds are a good buy for all investors. Emerging single markets exhibit very volatile and unpredictable characteristics. And successful investing in these markets requires higher risk tolerance, insightful political-economic sense, and excellent stock-picking skill,' Lipper said.
It noted that a US$1,000 investment in the Russian market at the beginning of 1995 was worth $4,700 18 months later. After another year it had shrunk to a mere $400.
Bond funds gained an average 4.28 per cent last month, their best month since rising 4.97 per cent in December 2000.
European bond funds performed best, helped by a weakening US dollar, while Hong Kong dollar bond funds were the worst performers.
In its latest global research report, consultant Cerulli said fund managers were reporting increased interest in more traditional products, such as bond funds, balanced vehicles and lifestyle funds - suggesting that investors were spreading their wings and moving away from ultra-conservative guaranteed products which accounted for 91 per cent of mutual fund inflows in Hong Kong last year.
'A small but reliable amount of anecdotal evidence, however, suggests that investors may be moving back to basics,' Cerulli said.
'This early trend - if one could call it that - cannot yet be fully captured, and the capital-guaranteed frenzy likely still has steam,' it added.
Cerulli suggested that fund managers needed to prepare more traditional investment funds in case capital-guaranteed and structured products fell out of favour.
Stewart Aldcroft, managing director at Investec Asset Management, said overall mutual fund sales were down compared with last year, mostly because guaranteed funds were not attracting a lot of money as they could not achieve the same rates of return in the present economic climate.
'People have not been buying equity funds but they have been buying bond funds,' he said, noting that the principal reasons for investment caution, namely Sars and geopolitical concerns, had eased.
'The one thing that needs to be made abundantly clear is that the investment return horizon has to be lowered,' he said.
'Gone are the days when you could expect to make 20 per cent or more a year. If you can make 10 per cent in this environment that is good.'