Ideal time for some to go defensive with their pension fund
It may be time to dust off the old investment mantra of 'buy into weakness and sell into strength', according to a pension scheme adviser.
Booming equity markets in the past year make this an ideal time for those leveraged to equity growth funds to switch into more defensive asset allocations - especially if you plan on moving out of the country or dropping out of the workforce soon, says Gloria Siu, director of Mandatory Provident Fund (MPF) consultancy Gain Miles Group.
She advises those planning a major move within five years to lock in last year's gains by switching their pension scheme allocation from growth to balanced funds. The shuffle, she says, should entail switching all current holdings as well as all future monthly contributions. Balanced funds typically are made up of between 50 to 60 per cent equity, with the remainder in bonds.
High-growth funds such as Hong Kong equity returned on average 30 per cent last year, a healthy return that will be difficult to match in the months ahead.
'We believe this year will be a very volatile one for the financial markets,' Ms Siu says. 'It is not an easy year to be invested.'
Despite the almost universal wall of optimism from financial advisers regarding equity markets this year, Ms Siu believes the global outlook is anything but rosy. Chief among her concerns is a looming rise in the United States interest-rate cycle, a round of elections in Asia that threaten political stability, and a global investment culture geared more towards momentum investing than valuation.
The S&P 500 is trading around 23 times earnings, a relatively rich valuation more in line with previous market peaks.
She says her advice should be viewed as applying primarily to pension plans held under the MPF or private company schemes.
The long-term savings schemes are designed to harness the power of dollar-cost averaging, levelling out the effects of volatile equity markets over time. However during major bear markets, high-risk funds can lag more defensive asset allocations in the short term.
Ms Siu says she believes in dollar-cost averaging for long-term investors with a minimum 10-year horizon. Investors with a horizon of five years or less should be allocated more defensively in view of the global stock-market recovery last year.
Individuals looking at retirement in five years could keep their assets in a combination of balanced and medium-risk products (those with an equal bond and equity make up). One reason for the higher risk tolerance, she says, is that retirees are not likely to draw down their accounts right away and could accumulate further capital gains by staying leveraged to the equity markets over time.
She advises those with a 10-year or longer work career ahead to stick to their guns and fire contributions into high-growth equity.
The most popular MPF asset allocation class was medium and high-risk funds at 50.5 per cent, followed by low-to-medium risk funds at 16.7 per cent and capital preservation at 15.8 per cent.
Recent survey findings, conducted on the third anniversary of the MPF launch, reveal most contributors have fairly high expectations of investment return, with a third of MPF contributors expecting 6 to 10 per cent annually. Around one-fifth of policy-holders expect 11 to 20 per cent.
Since the MPF was introduced in early 2001, total funds under management have risen to HK$90 billion. The success of the retirement scheme and the growing cash hoard probably means more international players will participate in the pension market. This should be accompanied by the development of new offerings such as annuity products and index-linked investment products.
Ms Siu says that after three years the MPF has largely proven a success, but it is clear the scheme will not provide sufficient retirement benefits for most contributors. As a result, she says individuals need to take more initiative in the management of their portfolios and seek to top up with either bigger contributions or investment in separate retirement funds.
