Volatile share markets and low bank deposit rates have attracted Asian retail investors to fixed income products in numbers never seen before, reflecting both a maturation of the investor market and an appetite for higher yields.

“In the past Asian retail investors were focused on the share market and equity funds, so distributing and marketing bond funds in Asia was difficult relative to Europe,” says Ben Yuen, head of Asian fixed income UBS Global Asset Management.

“After the financial crisis prompted by the collapse of Lehman, the mindset of Asian retail investors changed. They are now also investing in bond funds and, in particular, are looking for stable returns.”

Asia-based fund managers say the trend began about 18 months ago, but has seen a sharp acceleration in the past six months.

Data from the Hong Kong Investment Fund Association show a steady rise in bond fund sales versus sales of other investment products. In 2009, bond funds accounted for 27 per cent of total fund sales, up from 16 per cent in 2008. Interest in bond funds rose even further in the first quarter of 2010, accounting for 38 per cent of total sales. In March, bond funds grabbed 48 per cent of the local fund market.

“There is a group of investors out there who are unconvinced of the economic recovery and the prospects for equity investments, so they are looking for asset classes that are less risky but still offer attractive returns,” says Lieven Debruyne, chief executive officer of Schroder Investment Management in Hong Kong.

The Hong Kong data also reveal a growing appetite for Asian fixed income in particular. Asian bond fund sales as percentage of total bond fund sales rose to 19 per cent in the first quarter of 2010, from 15 per cent in 2008.

Asian investors are focusing on growth within their own region given relatively low levels of debt for both corporate and sovereign issuers. They are also believers in continued strong growth in Asia compared with Europe and the US. Strengthening local currencies are also helping to keep their attention on the regional market.

“The economic numbers are giving investors confidence in regional economic growth and that the recovery momentum is strong,” says Mr Yuen. “We do not believe there will be pressure to raise interest rates in the short term, which is positive for higher yield products such as this.”

Asian retail investors, long known for their risk appetite in the equity market, are bringing their demands for high returns to the fixed income market as well. They are generally targeting higher yielding bonds than their counterparts in the US or Europe, another factor bolstering demand for emerging market bond products.

“What they are looking for is high yield,” says Bonnie Lam, head of wholesale business for Asia-Pacific at HSBC Global Asset Management. “Here in Asia people have more appetite for different types of fixed income. They look at individual bonds, bond funds, high yield.”

Ms Lam said the job of fund managers is to educate new bond investors and make sure they understand longer term trends of the fixed income market.

“Last year’s gains were abnormal. We had double-digit growth. This year we have to manage expectations so they realise that high single-digit growth would be very good in this market. This is the dangerous part of the retail market here.”

Given those demands for performance, Ms Lam is not convinced that the interest in bond products will last despite a renewed focus on preaching the benefits of diversification.

“If market sentiment were more positive and the economy were to stabilise they’d go back to equity. But distribution has also changed behaviour. Since the crisis the banks who sell the funds are doing more to educate customers to diversify their portfolios and customers are more willing to listen,” Ms Lam says.

Fund managers are reacting by preparing new products to meet the growing demand. UBS launched its Asian bond fund at the end of January with $100m and since then it has grown to $500m. More than half of the demand for the fund during its launch period came from Asia but, since then, there has been growing interest from Europe where the ongoing government debt crisis has encouraged diversification.

Schroders already offers a range of Asian bond funds focused on regional markets, but the company is looking to launch more products that offer fixed payments.

“We’re looking at products like high income bond funds with regular monthly payouts,” Mr Debruyne says.

“There’s one group of investors that are looking for a cash alternative, so they’re looking into fixed income. Then there’s the second group who have always been willing to take quite a bit of risk and they feel there is a higher chance of good returns in fixed income,” he adds.

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