Young newcomer may shake up pension funds

PUBLISHED : Monday, 17 May, 1993, 12:00am
UPDATED : Monday, 17 May, 1993, 12:00am

RETIREMENT fund management is set to change with fresh entrants, an emphasis on proper asset allocation, and benchmark performance ratings.

News in the spring of last year's poor performance by the industry highlighted the many problems Hongkong fund management houses have to grapple with, as well as the poor structural development of the local industry.

Wyatt retirement scheme data showed that the industry median return last year was 5.2 per cent, compared with 9.4 per cent inflation and 12 per cent wage inflation.

The inability of the industry to beat wage and price inflation for several years rang alarm bells at the offices of some trustee companies, which are supposed to monitor these funds, and of the employer firms which might be faced with a retirement liability short-fall in later years.

Hongkong's Hospital Authority happened to be setting up its own retirement provision arrangement for staff beneficiaries during this period.

Starting with a clean slate, it chose to break with the usual retirement scheme arrangement in Hongkong.

The standard local retirement scheme has balanced growth as its target.

Normally the corporate entity appoints a trustee and a single fund manager. These two then decide how to manage the funds in a 100 per cent delegation - or one could say abnegation - of fund management policy by the employer firm.

This means one fund manager chooses the asset allocation across the globe of fund management possibilities, taking in Hongkong equities (normally 25 to 40 per cent), international equities (weighted by the Morgan Stanley Capital International Index) and bonds (as measured by the Salomon World Bond Index).

The Hospital Authority has chosen a different approach.

After analysing fund data produced by actuaries the authority found that managers gave added value for Hongkong investments, but when they came to managing United States equities or bonds they were awful. So the authority chose to pick specialists for each fund management area.

For Hongkong it hired Schroders Asia and Citicorp International (20 per cent of assets).

For US equities it picked Fidelity International (12 per cent).

European equities would be managed by Morgan Grenfell Asset Management and Lazard Freres Asset Management (15 per cent).

GT Management has been picked to manage Japanese equities (12.5 per cent). Fiduciary Trust International and Credit Swiss First Boston Investment Management will do the fixed interest management (35 per cent).

In Southeast Asia, Schroders Asia was picked again (2.5 per cent of assets).

Of course, this will not guarantee overall performance that beats wage and price inflation. Only the right asset allocation can help in this.

But it might offer the fund a better chance of gaining from the added value these managers are going to try to offer.

Should the authority be unhappy about any one manager, it can fire the company concerned without disrupting the rest of the scheme.