For Immediate Release July 29, 2002

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63% of guaranteed fund investors are first-time-fund investors

63% of investors who currently invest in guaranteed funds have never invested in funds before, according to a survey commissioned by the Hong Kong Investment Funds Association ("HKIFA").

HKIFA commissioned NFO WorldGroup - Hong Kong to conduct a telephone survey in June/July 2002. 500 guaranteed fund investors were interviewed.

65% of the respondents indicated that prior to investing in guaranteed funds, they put the money in bank savings deposits. 45% put the money in time deposits. A much smaller portion put their money in other instruments, such as Hong Kong stocks (17%), forex (9%) or overseas stocks (4%).

The data indicate that the money invested in guaranteed funds is primarily sourced from bank deposits. The series of interest rate cuts in the last 18 months has left bank deposits rates at a historic low. This has prompted many depositors to look for alternative vehicles.

To cater for these demands, banks have been actively promoting guaranteed funds as an alternative. More importantly, the offering of these products ties in with a change in the strategy of many banks - in view of the margin squeeze caused by interest rate deregulation and fewer mortgages, more and more banks have put an increasing emphasis on broadening their sources of fee-based income.

Based on HKIFA data, gross and net inflows into guaranteed funds between January 2001 and May 2002 reached US$5.95 billion and US$5.59 billion respectively, accounting for 39% and 84% of the industry totals in the corresponding period.

The extremely strong inflows into guaranteed funds indicate that investors, many of whom are traditional depositors, perceive that the risk/return characteristics of the products match their needs.

46% of the respondents indicated that they had invested in guaranteed funds because of the guaranteed return. 38% believed that they offer higher returns than bank deposits. 30% viewed this a "low risk" product.

While guaranteed funds promise some forms of 'guarantee', this does not mean that they are risk-free. Potential investors should study the fund prospectus and note factors, such as the guarantee mechanism, the lock-in period, the up-front charges, the participation rate, the credit risk of the guarantor as well as other pertinent risks.

Investment patterns

Out of the 500 respondents, 59% indicated that they had put HK$50,000 or below into guaranteed funds. 80% pointed out that these products accounted for 30% or less of their total liquid assets.

Retail banks represent the key channel through which one buys guaranteed funds. 73% purchased guaranteed funds through their primary banks, i.e. where respondents do most of their banking transactions. The other channels are far less important - 11% bought through fund houses, 8% each bought through insurance companies and independent financial advisors - probably through investment-linked insurance products.

Respondents are generally satisfied with the services of guaranteed fund distributors: 64% of the respondents rate the services as "satisfactory" or "very satisfactory", 35% think the service is "fair". Only 1% finds the service "unsatisfactory".

Product knowledge

38% of the respondents expect their guaranteed funds will bring 5%-10% total return on maturity. 28% expect a return of below 5% while 14% expect 10%-20%. However, 16% have no idea about the return level.

80% of the respondents understand they would only enjoy the guarantee if they hold the fund until maturity. Out of this group, 67% were able to state the lock-in period, but the period cited varies substantially.

Up to 38% of the respondents are not aware that their guaranteed funds have a participation rate. 29% are aware there is such a rate but cannot recall the rate. 9% were able to cite the rates. 24% indicated that their guaranteed funds do not have a participation rate.

The data show that there is still much room for improvement in investor education as some investors do not have a full understanding of their investments.

Towards this end, HKIFA has been and will continue to develop educational initiatives for distributors and the public to ensure that investors can make informed investment decisions.

Out of the 500 respondents, half will hold their guaranteed funds until maturity. 36% may do so; and 12% have not decided yet. Only a very small percentage - 2% plan to redeem before maturity.

52% of the 500 guaranteed fund investors plan to put the money back to savings or time deposits on redemption. 19% will invest in other types of funds while 24% will adopt a wait-and-see attitude and make decisions according to the investment climate.

When asked what alternative investment will the respondents consider if there were no guaranteed funds, most said they would have kept their money in bank deposits. 16% would have invested in Hong Kong stocks.

The HKIFA has 45 fund management companies as full/overseas members. It has 48 associates, which include trustees and other professionals that are involved in the creation and administration of funds.