US slowdown dominates global concerns
When you consider that the United States economy accounts for roughly 25 per cent of global gross domestic product (GDP), it is easy to understand why professionals associated with Hong Kong's MPF sector are keeping an eagle eye on the fallout and possible knock-on effects of the recent subprime crisis.
'Global equity markets are moved by sentiment, and value is not always driven by fundamentals,' said Eric Wong, head of research for Lipper, which tracks and ranks the performances of local MPF funds. 'I am not saying the US is going into recession, but it is slowing down, which will affect companies in the rest of the world.'
In terms of the overall investment outlook, Mr Wong warned that equity markets would be less 'exciting' next year. He said people should prepare themselves for lower returns, while remembering that successful planning for retirement was all about taking a long-term view.
'Investment in US dollar denominated assets may not be attractive,' he said. 'Capital may continue to flow to countries that have strong economic and corporate earnings fundamentals with higher potential for their domestic currencies to appreciate against the US dollar in 2008.'
In Mr Wong's opinion, possible interest rate changes and measures designed to cool the mainland economy should not have a significant effect on fund performance.
'The market seems to be more concerned with the US economic outlook and corporate earnings growth and liquidity,' he said.
He suggested that the mainland and India offered good prospects. Like other developing economies, particularly in Asia and Eastern Europe, they could look forward to stronger medium- and long-term growth than developed economies on the back of continuing expansion in consumer spending, business investment and international trade.
'MPFs that invest in Hong Kong and China stocks have done very well in 2007,' Mr Wong said. 'They are being driven by energy, financial, property and telecom stocks.'
Mark Konyn, chief executive of RCM Asia-Pacific, which is wholly owned by Allianz Global Investors and manages more than US$16billion in Hong Kong retirement funds, said that members were now generally more aware of the investment issues concerning their MPF accounts.
Dr Konyn said that one of the major challenges in overseeing MPF-related assets was staying focused on investors' longer-term objectives in times of increased volatility. To do this, it was important to maintain the company's global research capabilities, so that members could benefit from local and international opportunities.
'In our opinion, many MPF funds are either overdiversified, holding too many stocks, or are too narrowly focused,' he said. 'In both situations, we do not believe that members are positioned optimally.'
To ensure consistent long-term performance, it was also essential to have a stable team, which was committed and fully understood the competitive nature of the industry.
'We are proud of the fact that our team is one of the most stable in the marketplace,' Dr Konyn said. 'This has helped us to maintain a very credible record throughout the different market cycles.'
He added that rapid staff turnover could create inconsistency and uncertainty for clients. He also noted that MPF investing should be regarded as a specialist skill in its own right, not simply an add-on to a mutual fund division.
'We have worked hard [to create] the right environment, resources, support and remuneration,' he said. 'The key battleground at the moment is for talent.' One of the key requirements of the business was to come up with the ideas that would drive performance and thereby give [us] an edge over competitors.
'Greater choice, I believe, is the biggest area for development,' Dr Konyn said.
Beyond the immediate scope of the MPF, the Allianz Group is also giving close attention to the evolution of the mainland's pension market. A recent corporate study covering demographic developments in Asia analysed the changing pattern of savings and investment behaviour in China and outlined ways in which the group could meet the country's untapped demand for modern financial products linked to retirement benefits.
The study estimated that from 2006 to 2015, the compound annual growth rate of China's pension market would be above 23 per cent. In view of the rapidly ageing population, the government had recognised that urgent reforms were needed since it would be impossible for the existing state pension system to fund future liabilities. The expected introduction of new options or obligations, requiring employers and individuals to contribute towards supplementary retirement schemes, would bring new opportunities for qualified service providers.
'The mainland is grappling with a host of issues in providing financial support for people in retirement,' Dr Konyn said. 'RCM is already participating in the management of retirement assets for mainland institutions and we are closely following developments. Fund managers can play a key role consistent with the longer-term objectives.'